Solid performance in the first half of fiscal year 22
In the first half of fiscal year 22, income increased by 32% compared with the same period last year, of which tuition income increased by 32%, and accommodation income increased by 29%. Benefiting from the group's diversification strategy, other revenues also recorded 25 per cent year-on-year growth, including 34 per cent year-on-year growth in commercial logistics and 35 per cent year-on-year revenue from training services. Due to the policy requirements to improve the quality of teaching, the operating costs of new higher education have increased significantly (for example, teaching-related costs increased by 71.5% year-on-year, and teacher-related costs increased by 31.5% year-on-year). As a result, gross profit fell to 40.2% (compared with 45.4% in the first half of fiscal 21), gross profit increased by 17% year-on-year, but on the other hand, the company continued to control expenses, resulting in a 17% year-on-year increase in net profit. As of February 2022, the net debt ratio fell 6.6 percentage points year-on-year to 50% (compared with 57% in August 2021), and the balance sheet continued to improve. New higher Education announced an interim cash dividend of 0.106 yuan per share, with a dividend yield of 49%, maintaining the high dividend level since fiscal 21, with an annualized dividend yield of 10.8%.
Teaching quality is the key factor of sustainable development
We believe that although the short-term gross profit margin is under pressure, from the point of view of competitiveness, future tuition fee promotion potential, government recognition and students' interests, we believe that the new higher education's attention to teaching quality is good for its development in the long run. The management pointed out that the company has increased its investment of about 256 million yuan in teaching facilities and equipment, campus construction, and cooperated with 1754 enterprises to respond positively to the government's measures on vocational education.
Both defensive and valuation attractiveness
The impact of education policy has led to a sharp fall in the valuation of the higher education industry. We believe that as the new higher education focuses more on endogenous growth, it will be able to achieve stable returns in the next few years, which is also the key to rebuilding investor confidence. In this new normal, the valuation of new higher education is attractive, with a price-to-earnings ratio of 4.5 times forecast earnings for fiscal 22 and a cash dividend yield of 10.2%. We have lowered our core net profit forecast for fiscal year 22 / 23 by 16% and 18% respectively, mainly due to higher costs / fees and tax expectations. Based on a price-to-earnings ratio of 8 times for the next 12 months (down from 11 times previously), we lowered our target price from HK $6.9 to HK $4.3, corresponding to a forward price-to-earnings ratio of 8.8 times / 7.6 times forward earnings for fiscal year 22 and a forward dividend yield of 5.7% for fiscal year 22. Main risks: 1) increase in the number of students / tuition fees; 2) for-profit registration-related costs; 3) policy risks.