FY21 revenue increased 45% year on year to RMB 1.1 billion, core operating profit increased 37% year on year, and adjusted net profit increased 32% year on year

Kopei recently announced the mid-year results for FY21 (ending June), so the current FY21 results were basically in line with expectations, and the year-end date was changed to August

Shifting to an asset-light model, the long-term growth rate may decline. Maintaining the buying rating, the target share was lowered to HK$5.7, and the FY21 results were basically in line with expectations

Kopei changed its year-end date from December to August, the same as other major higher education groups. Revenue for FY21 increased 45% year on year compared to FY20 exam preparation performance, gross profit increased 48% year on year, core operating profit increased 37% year on year, adjusted net profit increased 32% year on year. FY21 was mainly contributed by the consolidation of schools in Harbin starting in April 2021. The growth rate of endogenous revenue was 37% (mainly from Guangdong University of Technology). Copei announced a final dividend of HK$0.06 per share, with a payout ratio of 36%, corresponding to a dividend yield of 1.4%. Due to increased borrowing, Kepei turned into net debt, with a net debt-to-equity ratio of 4% as of August 2021 (compared to a net cash/equity ratio of 29% as of December 2020)

The positive outlook for FY22 remains unchanged

The revenue growth rate for FY22 is 35-40% year-on-year, core net profit will increase by about 25% year on year, and target core net profit for FY23 will increase by about 20% year over year. The main drivers for FY22 are: 1) the number of students is estimated to reach 123,000 (up 17% year over year), driving endogenous growth; 2) the full merger of schools in Harbin will contribute 34% of FY22's incremental revenue; 3) New merger: Ma'anshan schools will begin merging in March 2022, which will contribute 16% of FY22 incremental revenue. As the number of students gradually rises, Huaibei schools will contribute 12% to FY22's incremental revenue. In the long run, all universities under Kepei have expansion plans to support student growth, and plans to buy a new plot of land for schools in Guangdong this year.

Shifting to an asset-light model

Management said the growth strategy will shift from mergers and acquisitions driven by mergers and acquisitions that have been followed since listing. Kepei said it will reduce its debt burden and provide services in areas such as admissions, operations, and teaching. Kopei has already set up 2 maternity and education colleges, using their educational resources to provide vocational education services.

The valuation is attractive and the buying rating is maintained

We adjusted our financial forecast to the end of August (compared to the previous end of the year ending in December). We expect revenue/adjusted net profit to grow 39% and 24% year over year in fiscal year 22. We believe that the asset-light model drives long-term growth less than mergers and acquisitions, so we lowered the price-earnings ratio for the next 12 months from 13 times to 11 times (corresponding to the historical average - 1 standard deviation), and lowered the target price from HK$7.4 to HK$5.7. Our target price corresponds to 12 times/10 times the predicted price-earnings ratio for fiscal year 22/23.