Yuhua's revenue in fiscal year 21 reached 2.6 billion yuan, an increase of 30% over the same period last year, and the adjusted net profit reached 1.4 billion yuan, in line with expectations.

Yuhua announcement will no longer pay dividends, which we think will have a negative impact.

The lack of performance catalyst and the cessation of dividend payments led us to downgrade to neutral; the target price was lowered to HK $3.6

Split K-9 service

Yuhua excluded its investment in Kmur9's business because of the policy banning Kmur9 compulsory schools from registering as for-profit and related party transactions. The company has 18 Kmuri 9 schools, three of which will be converted to higher vocational education. In the long run, Yuhua plans to convert the remaining Kmuri 9 schools to higher or secondary vocational schools, depending on policy requirements and license approval.

The results in FY21 are in line with expectations, and the growth rate of non-Kmur9 business slows down.

Affected by the above factors, Yuhua's financial statements no longer include Kmur9 business, while the revenue of non-Kmur9 business grew by 11% year-on-year in fiscal 21, and adjusted net profit increased by 44% compared with the same period last year. The gross profit margin was outstanding, rising to 67.2% from 61.7% of the exam preparation data for fiscal year 20, and pushing the core net profit margin up to 55.7% from 43.1% of the exam preparation data for fiscal year 20. Yuhua announced that it would no longer pay dividends for at least the next two years, but would keep it as an investment. We believe that the suspension of the dividend will have a negative impact because it is different from the dividend policy of the industry, and the market also expects the higher education industry to have a stable cash flow. In addition, some investors are also unhappy with the company's lack of mergers and acquisitions since the acquisition of Shandong Talent College in 2019, as well as the recent rights issue in October.

Downgraded to neutral; target price reduced to HK $3.6

Due to the lack of a clear profit driver and catalyst, as well as the recent share issuance and the cessation of dividends, we downgraded Yuhua's rating from buy to neutral. If Yuhua does something in terms of mergers and acquisitions or major expansion, which will lead to higher growth expectations, our view will turn positive. We lowered our target price from HK $4.3 to HK $3.6, based on 8 times the price-to-earnings ratio for the next 12 months (down from the previous 10 times, referring to the historical average-2 standard deviations). Our target price corresponds to a forward price-to-earnings ratio of 8.2 times / 7.4 times 22-pound forward earnings for fiscal year 23.