Incident: The K9 business was terminated, and FY2021's revenue/adjusted net profit to the parent increased by 11.2%/37.9%. The company's K9 business was removed from the scope of the consolidated statement. FY2021 revenue increased 11.2% to 2,259 million yuan, the net profit of the mother increased by 304.5% to 825 million yuan, and the adjusted net profit of the mother increased by 38.9% to 1,435 million yuan (adjusting K9 business termination losses, equity incentive expenses, changes in the fair value of convertible bonds, etc.). With FY2021, the company's profitability continued to increase, gross margin increased 5.5 pcts to 67.2%, sales expenses ratio decreased by 0.5 pCTs to 1.8%, and management expenses ratio decreased by 1.2 pcts to 8.6%. In summary, the company's adjusted net interest rate to the mother increased by 12.3% to 63.5%.
The focus is on developing higher education business, and the strategic focus has been further clarified. The “Regulations for the Implementation of the Public Promotion Law”, which came into effect on September 1, 2021, prohibits social organizations and individuals from controlling private schools that implement compulsory education through mergers, acquisitions, agreement control, etc., and prohibits private schools implementing compulsory education from trading with stakeholders. The company currently operates 4 domestic and foreign universities, 5 high schools, 13 compulsory education schools and 5 kindergartens. After listing, it was clear that higher education was the focus of strategic development. After the “Implementation Regulations” came into effect, the company consolidated statement divested the K9 business and planned to transform the existing K12 school into a higher vocational college to mitigate the impact of the policy and further clarify the strategic focus.
Seize the dividends of vocational education policies, and use placement financing to expand the scale of operation of schools. On October 12, the Central Office and the State Office issued “Opinions on Promoting the High-Quality Development of Modern Vocational Education”, which gave favorable policies for the development of undergraduate vocational students. Following the announcement of the policy, the company completed placement financing in October 2021, placing 220 million shares at an allocation price of HK$419 per share, totaling HK$922 million. Proceeds will be used to: (1) transform the company's 3 K12 schools in Zhengzhou, Jiaozuo and Luohe into higher vocational colleges. The company has applied for proof of operation of relevant senior positions. Furthermore, the company plans to upgrade to vocational universities in the future; (2) the Hunan University of Foreign Economics opens new campuses; and (3) the three existing universities increase investment and establish vocational undergraduate education. Through the upgrading of new higher vocational colleges and the establishment of vocational undergraduate majors for existing undergraduates, the company is expected to fully benefit from this favorable policy and expand the scale of operation of schools.
Investment advice. After the merger of the K9 business was terminated, the company further focused on higher education as the business development focus, carried out post-investment integration of mergers and acquisitions to continuously improve the profitability of the school, and expanded campus capacity through the construction of new campuses. According to the company's FY2021 annual report, considering the cancellation of the K9 business, we expect the company's FY2021-2023 net profit to be 15.40/17.67/1,967 billion yuan, an increase of 86.8%/14.7%/11.3%, corresponding to EPS 0.43/0.49/0.55 yuan, and the current price corresponds to PE 6X/6X/5X, maintaining the “buy” rating.
Risk warning: Local implementation rules for the “Civil Promotion Law Enforcement Regulations” have not yet been implemented, and there is a risk that policies will be uncertain; the company's operations and profitability have not met expectations; and extended mergers and acquisitions plans have not met expectations.