Yuhua Education Group announced its results for fiscal year 21. Excluding the K9 school business classified as termination of operation, Yuhua Education Group achieved an income of 2.259 billion yuan (an increase of 11% over the same period last year). The adjusted income (including K9 business income) was 2.643 billion yuan (up 10% from the same period last year), and the adjusted return net profit was 1.435 billion yuan (up 38% from the same period last year). This performance is in line with our expectations. We believe that the rapid increase in profits is mainly due to the effective cost control of the Group and the consolidation of minority shareholders' interests in Hunan Institute of Foreign Economics and Shandong Institute of Excellence.

K9 business table, policy risk elimination. Yuhua Education will divest K9 business in fiscal year 22 due to the clear restrictions on related party transactions in compulsory education institutions in the Private Education Promotion Law (implementation regulations). And in the 21 fiscal year report, K9 school business is classified as termination of business. According to the divestiture of K9 business, the group's revenue in fiscal year 21 will be reduced by 385 million yuan, gross profit by 198 million yuan, and adjusted net profit by 134 million yuan. The business income, gross profit and adjusted net profit of senior high school and university are 2.259 billion yuan, 1.52 billion yuan and 1.3 billion yuan respectively. As a result of the one-time impairment loss of 1.042 billion yuan resulting from the termination of the merger of K9 schools, the fee will be spun off off the balance sheet with the K9 business and will not be included in the group income. After deducting the fee, the adjusted profit reached 1.435 billion yuan.

The volume and price of higher education business has increased simultaneously, and the expansion of production capacity ensures endogenous growth in the future. The business income of non-K9 schools in Yuhua Education reached 2.259 billion yuan in fiscal year 21. Of this total, the revenue from higher education business was 2.02 billion yuan, an increase of 15% over the same period last year, accounting for 76.6% of the total income, an increase of 10 percentage points.

The expansion of higher education revenue is mainly due to a 7.1 per cent year-on-year increase in the number of students from 106000 in FY20 to 114000 in FY21. In the same period, the average tuition fee rose 7.5% to 17800 yuan compared with the same period last year. The gross profit of higher education business was 1.52 billion yuan, an increase of 27.1% over the same period last year. Gross profit margin increased by 6.8 percentage points. The company continues to empower the management of M & An institutions, and the business performance continues to improve. High school income from non-K9 businesses fell 13.4 per cent to 230 million yuan, while gross profit fell 34.4 per cent to 79.55 million yuan compared with the same period last year. The share of high school business fell 1.4 percentage points year-on-year to 8.9%. The company will continue to carry out business transformation, and plans to transform the primary and secondary schools in Xingyang City, Jiaozuo City and Luohe City into three higher vocational colleges. According to the plan, when the three schools mature, the number of students in each school will reach 12000. Based on the assumption that the enrollment plan of a single school will reach 5000 in the fourth year of running a school, with an enrollment rate of 80%, we expect that the enrollment of the three higher vocational colleges will reach 11800 in the fifth year. We estimate that in the fifth year of the three schools, the average tuition fee is expected to reach 16700 yuan. As a result, each school will achieve an income of 197 million yuan, a net profit of 62.87 million yuan and a net profit margin of 32%.

Maintain the buy rating. Due to the appearance of K9 school business, the efficiency of higher education business is close to the extreme level, and we believe that the growth rate of the company's non-K9 business will slow down in the future. We downgrade the adjusted net profit forecast for Yuhua Education for fiscal years 22 and 23 to RMB 1.361 billion and RMB 1.445 billion, and the adjusted net profit for the new 24 fiscal year to RMB 1.621 billion. We have lowered our forecast for earnings per share for the group's fiscal year of 22-23-24 to RMB 0.38, 0.40, 0.46. We lowered our target price to HK $4.57, corresponding to a 23% increase in the current price. Maintain the buy rating.

Risk hint: the approval progress of higher vocational colleges is not as expected; the enrollment of new schools is not as expected.