Huaxia Audiovisual Education announced that its revenue in 21 years was 578 million yuan, down 27% from the same period last year, and its adjusted net profit fell 49% year on year to 187 million yuan. Both revenue and profit were significantly lower than we expected. We believe that the decline in revenue and profit is mainly due to the divestiture of the company's art examination training business Shuimuyuan studio, while the company's film and television business has uncertainty in revenue recognition and project delivery. In terms of income structure, the revenue of higher education business was 472 million yuan, up 30% from the same period last year. Due to the decrease in the number of projects delivered throughout the year, the revenue of the film and television production business decreased by 75% to 105 million yuan. Due to the increase in the proportion of highly profitable higher education business, Huaxia audio-visual education had a gross profit margin of 47.8% in 2021 (an increase of 3 percentage points over the same period last year).

Divest the art examination training and return to the original main business. The company announced on March 28 that it would divest the art examination training brand Shuimuyuan studio, which was completed in April 2021.

The company believes that the announcement on standardizing non-disciplinary out-of-school training issued by the Ministry of Education in March 2022 will strengthen the supervision of non-disciplinary education and training and have a negative impact on Shuimuyuan's business. So the company chose to activate the termination agreement signed at the time of the merger and asked the founder of Shuimuyuan Studio to buy the business for 178 million yuan. We believe that after the company sells Shuimuyuan, the company will lose the growth point of its new business, and the coordination between the original art examination training and the main business, such as the shared enrollment center of Nanjing Media College, will also be interrupted, and the company will return to the dual main business of university operation and film and television production.

The operation of colleges and universities is sound and the growth is expected. After the acquisition of the Olympic College, we expect the number of new students enrolled in Nanzhuan to gradually increase from 8437 in the 22nd academic year to 9796 in the 25th academic year. With the addition of international education and adult education, we expect the total number of students to grow to 39000 in the 25th academic year, a compound growth rate of 22% in four years. At the same time, the company's investment in Nanjing Institute of Communication and Olympic College will also meet the growth of the scale of students. In addition, as the relaxation of tuition control in Jiangsu Province is still uncertain, we maintain the expectation of tuition fees for the 22max 23 academic year, and expect the tuition fees for the 23max 24 academic year to be slightly increased to 18000 / year, an increase of about 12.5% over the 22max 23 academic year. Therefore, we expect that the business revenue of colleges and universities will reach 857 million yuan in 2024, with a compound growth rate of 22% in three years.

There is uncertainty in the release of movies and TV dramas, and the revenue disturbance is obvious. The revenue of the company's film and television sector in 2021 was only 105 million yuan, significantly lower than 427 million yuan in 20 years.

Due to the uncontrollable characteristics of the release time of movies and TV dramas, and the company has only two potential dramas to be released in the next two years (Evil from the East and the West and Emperor Kangxi), we have reduced the annual revenue of the company's film and television sector to between 204 million and 212 million yuan per year from 2022 to 2024. Compared with previous years, the income of more than 400 million yuan decreased by 50-52%, and the annual pre-tax profit of the film and television business was reduced to between 31.68 million and 33.3 million yuan.

Down to hold. The company is undergoing business adjustment, divesting the art examination training business, and returning to the dual main business of higher education operation and film and television production. We believe that the future growth momentum of the company will be undermined by the divestiture of the arts test training business. At the same time, due to the uncertainty of the price increase of higher education business and the high uncertainty of the release of film and television business dramas, the predictability of the company's future performance growth is weak. As a result, we have lowered the Group's adjusted net profit forecast for 2022amp 2023 to $350 million, with an additional forecast of $401 million for 2024. We lowered our target price to HK $1.34 and downgraded to hold rating.

Core hypothetical risk: the release of film and television series is not as expected; the enrollment plan of colleges and universities is not as expected.