Yuhua Education 6169.HK made a major change in its financial results this year: classifying K9 as discontinued business and publishing financial data excluding K9 (from kindergarten to junior high school) for comparison. Starting from fiscal year 2022, K9 business is no longer consolidated. In fiscal year 2021, K9 business revenue and operating profit were 385 million yuan and 137 million yuan respectively, accounting for 14.6% and 9.37% respectively. As the K9 business is about to be spun off from the financial report, this annual report provides for a 1.042 billion impairment at a time. In the future, the company will focus on higher education. There are no new M & A projects in the past year, and the growth rate of endogenous growth will inevitably decline. We will lower our revenue and profit forecasts for the next three years. Short-term lack of catalyst, but the stock price has responded to pessimistic expectations, we maintain the buy rating, target price 4.72HKD, corresponding to 11x2022 forecast PE.
The K9 business will no longer merge in the next fiscal year, contributing less than 10% of its profits according to the regulations on the implementation of people's Promotion of Development, which came into effect on September 1 this year. Social organizations and individuals are prohibited from controlling private schools that implement compulsory education through mergers and acquisitions, agreement control, and non-profit private schools that implement pre-school education, and private schools that implement compulsory education are prohibited from trading with related parties. Accordingly, the Group decided not to merge K9 business from fiscal year 2022, and to transform some existing K12 schools into higher vocational colleges. To this end, the company made an one-time impairment loss of RMB 1.04 billion (the net asset value of K9 business) in fiscal year 21. The assets of future listed companies will only include higher education institutions and senior high schools. Considering the proportion, growth rate and profit margin of K9 business, the divestiture of K9 business has little impact on the overall financial situation of the company.
In fiscal year 21, revenue and profit accounted for 14.6% and 9.37% respectively, and the growth rates of income and net profit were 1.9% and 7.5% respectively, significantly lower than the overall growth rate of the group. The gross profit margin of K9 and non-K9 business is 51.4% and 67.2% respectively, and the net profit margin is 46.2% and 76% respectively. The profitability of K9 business is also significantly lower than that of non-K9 business. As for the future plans of the K9 business, the Group is already working on transforming three of the K12 schools into higher vocational colleges, and the other K9 schools will also seek transformation in the future. Not long ago, the company made a discount rights issue financing, the funds were mainly used for the construction of new foreign-related campus in Hunan, and three K12 schools in Henan were transferred to higher vocational education.
Revenue (excluding K9) and adjusted net profit in fiscal year 2021 increased by 11.2% and 37.9% compared with the same period last year. The company's revenue in fiscal year 2021 was 2.643 billion, which was + 9.7%, excluding K9 business income of 2.259 billion, and + 11.2%. The net profit attributable to equity holders of the adjusted company is 1.435 billion, year-on-year + 37.9%. The adjustment items are share-based salary expenses (including K9 schools), fair value adjustment of identifiable assets, CB fair value adjustment, government subsidies and 1.042 billion impairment losses caused by divestiture of K9 business. Diluted profit per share is 0.33 yuan (excluding K9 business).
The history of post-merger integration is excellent in the past, and it is expected that there will be more colleges and universities under the higher education project group in the future, except Zhengzhou Industrial and Commercial College. The post-merger integration is quite excellent: Hunan contributed 375 million of profits in the 21 fiscal year (only 63 million at the time of mergers and acquisitions); Shandong talents made an adjusted net profit of 300 million (only 106 million at the time of mergers and acquisitions). Stanford International contributed 50 million of profits this year (a loss on mergers and acquisitions) and is expected to contribute at least 75 million of profits in fiscal 22.
Profit forecast and investment advice
Considering that the K9 business will be spun off next year, and the group's university business is approaching maturity, and it will take time to build a new campus and transform K12 schools into higher vocational schools, the growth rate of endogenous growth will inevitably decline, we downgrade our revenue and profit forecasts for the next three years. Capital expenditure is expected to be large in the next three years, and no final interest will be paid this year. We believe that the stock price has responded to pessimistic expectations, maintaining the buy rating, the target price 4.72HKD, corresponding to the 11x2022 forecast PE.