The new higher education group announced that its mid-term income in fiscal year 22 was 1.036 billion yuan, an increase of 32% over the same period last year, while its net profit was 345 million yuan, an increase of 17% over the same period last year. Both revenue and profit growth are in line with our previous expectations. We believe that the increase in corporate revenue is mainly due to the increase in group tuition and accommodation fees and the consolidation of newly acquired institutions (Lanzhou school and Zhengzhou school). In the composition of income growth, the endogenous growth rate contributes about 16%, while the rest is contributed by extension mergers and acquisitions.

Endogenous extension dual-drive, training business growth is eye-catching. The income of the New higher Education Group in mid-22 was 1.036 billion yuan, an increase of 32% over the same period last year. Among them, endogenous development and epitaxial mergers and acquisitions contributed about 16.2% and 15.5% of the revenue growth respectively. In terms of endogenous growth, in the 22nd academic year, the number of students enrolled in the group benefited from the increase in the number of junior college students brought about by the 3 million enrollment expansion of higher vocational education over the past three years, with a year-on-year growth rate of 14% to 144000. At the same time, driven by the strategy of high quality and high price, combined with an average employment rate of over 98%, the group has an excellent reputation, and the average tuition fee has increased slightly by 2%. In addition, the Zhengzhou school acquired by the company in 2021 was completed and listed in September 21, while the self-built Lanzhou school was also merged in April 21, so the income of the two schools also contributed to the group's growth in the interim results of 22 years. At the same time, based on the basis of high-quality school, the company has expanded the business of non-academic vocational training. And received 94.82 million yuan in service revenue in the middle of fiscal year 22, an increase of 1148% over the same period last year. We believe that the vocational training business is expected to become a new momentum for the future development of the company, which will drive the Group's other earnings and gains to reach 509 million yuan in fiscal year 24.

The high-quality strategy increases the input of teachers and hardware, which affects the profit margin in the short term. In the middle of fiscal year 22, the gross profit margin of the New higher Education Group was 40.2%, down 5.2 percentage points from the same period last year, and the net profit margin was 33.3%, down 4.2 percentage points from the same period last year. We believe that the decline in profit margins is mainly due to the group's continued improvement in the quality of teaching, the building of a team of teachers and the increase in the cost of hardware input in colleges and universities, and the main cost increased by 44% year-on-year, exceeding the increase in income. In addition, as the group stepped up its new media brand promotion in fiscal year 22, sales expenses increased 88 per cent to 15.6 million yuan compared with the same period last year. With the ability of collectivization to run a school, the company's administrative expenses accounted for a further decline in revenue, to 5.6% (down 0.9 percentage points from the same period last year). Looking to the future, we believe that with the gradual completion of the core construction of the group and the decline of hardware investment, the growth of the company's main cost will slow down, thus driving the recovery of profit margins.

Keep buying. As the growth of the new higher education full-time education business has slowed, and the growth of teachers and hardware investment has suppressed the profit margin, we expect the group's profit margin to fall to 34.7% in fiscal year 22. In the future, we believe that the net interest rate will mainly rely on the development of vocational training business to expand slightly, which is expected to reach 38.9% in fiscal year 24. We have reduced the group's attributable profits for fiscal years 22, 23 and 24 to $695 million, $812 million and $935 million. We lowered our target price to HK $3.26, corresponding to 38% room for growth, and maintained our buy rating.

Risk hint: the development of vocational training business is not as expected; the price increase of tuition is not as expected.