Since we downgraded Yuhua to neutral, Yuhua's share price has fallen 37% (the industry's average drop is 26%), mainly due to panic about policy rumors.

We believe that the restructuring of Yuhua Kmur9 business has been reflected, and even assuming there are no new mergers and acquisitions in the future, the current valuation is still attractive.

Upgrade to buy rating: driven by vocational education support policies, endogenous growth remains robust; keep profit forecast and target price unchanged

The share price has fallen significantly.

Since we downgraded Yuhua to neutral on December 1, 2021, Yuhua's share price has fallen 37% (the industry's average decline is 26%), and the price-to-earnings ratio for the next 12 months has fallen from 6.6 times to 4.0 times (the industry's average decline is 30%). We believe that the decline in the share price is mainly due to: 1) panic about policy rumors about the VIE structure; 2) the poor performance of FY21 due to the divestiture of Kmur9, coupled with the uncertainty of cash dividend policy and mergers and acquisitions, the company has not made any new mergers and acquisitions since 2019.

However, the endogenous growth is still solid, and the stock price has exceeded its price.

We believe that Yuhua's share price is now oversold, even lower than the scenario of "no new mergers and acquisitions" in the future, while endogenous growth is still robust. We expect Yuhua's core profit to grow at a compound annual growth rate of 13% in the 21-23 fiscal year, driven by: 1) the increase in the number of students and tuition fees driven by the supportive policies of vocational education; 2) the expansion of two new campuses (that is, the Lankao campus of Zhengzhou School and the new campus of Hunan School) 3) three Kmuri 9 schools in Henan will be converted into vocational colleges (we expect to generate revenue in FY23), and Yuhua plans to upgrade these three schools to undergraduate universities in the long term; 4) Yuhua plans to convert the remaining Kmuri 9 schools to vocational colleges or secondary vocational schools, depending on policy regulations and license application.

Based on the upward valuation to buy rating; the target price remains unchanged at HK $3.60, taking into account Yuhua's quality university assets, past M & An execution and good profitability, we believe that Yuhua has been undervalued. We upgraded Yuhua to a buy rating based on an attractive valuation (Yuhua is currently trading at 4.3 times earnings for fiscal 23). We keep our earnings forecast and target price of HK $3.6 unchanged, based on 8 times the price-to-earnings ratio for the next 12 months (unchanged). Our target price corresponds to a price-to-earnings ratio of 8.2 times / 7.4 times 22 pounds for FY23. We reiterate the assumption that the basic scenario is that the government's policy support for the higher education industry remains unchanged. Main risks: tuition fees, the growth of the number of students, operating cost control, and policy risks.