Focus on high-quality vocational education; maintain a high dividend strategy
New Higher Education Group (New Higher Education) 1HFY22 revenue increased 31.7% year over year to RMB 1,036 million, mainly due to steady increases in tuition and accommodation fees and the merger of the two new schools. The company's 1HFY22 revenue was 53% of Huatai's annual revenue forecast, which is in line with expectations. Gross margin fell 5.2 percentage points year over year to 40.2%, mainly due to increased investment in teaching staff and campus facilities. Guimu's net profit increased 17.2% year-on-year to RMB 345 million, mainly driven by increased revenue from vocational training and logistics services. The medium-term payout rate is around 48%. As the company further enhances the quality of running schools, we expect gross margin to gradually drop to 35% by FY25, so we lowered FY22/23/24's net profit to RMB 647.04/758.88/88/829.29 million yuan (previous value: RMB 781.63/941.46/1,087.73 million yuan). Following market changes, we raised the WACC to 12.11% (previous value: 11.85%) and lowered the target price to HK$5.78 (continuous growth rate of 2%, HKD/RMB = 0.82). Keep “buying.”
Continue to increase investment in running schools and improve the quality of running schools
In terms of teaching talents, the company introduced more than 500 high-end talents, and the number of teachers with master's degrees and above increased 21% over the same period last year. At the same time, the overall remuneration of faculty and staff in core positions was raised to build a high-quality team of faculty and staff. In terms of teaching facilities, the company continues to build and upgrade software and hardware such as experimental training rooms and intelligent cloud teaching platforms. In terms of teaching, the company cooperates with well-known universities at home and abroad to establish superior majors. The company has achieved impressive results through continuous investment in teaching. At the end of 2021, the average employment rate of the company's schools reached 98%, far higher than the national average. We expect the company to continue to invest more in its teaching staff and school facilities to achieve sustainable endogenous growth.
Keep up with vocational education policy guidelines and continue to create stable returns
The newly revised Vocational Education Law was issued on April 20, 2022. The new law clearly aims to promote diversification of schools, give full play to the important role of enterprises in running schools, promote enterprises to participate deeply in vocational education, and encourage, guide, and support enterprises and other social forces to organize vocational schools and vocational training institutions in accordance with the law. We believe that the company's high-quality connotative development strategy is in line with the direction of the national vocational education policy, and is expected to achieve further business development in areas such as integration of industry and education and school-enterprise cooperation in the future. At the same time, the company plans to continue its high dividend strategy in the future to bring a steady return on investment to shareholders.
Lower the target price to HK$5.78 to maintain “buying”
Considering the company's continued investment in running high-quality schools, which led to a decline in gross margin, our net profit of FY22/23/24 was RMB 647.04/758.88/829.29 million yuan (previous value: RMB 781.63/941.46/1,087.73 million yuan). As the market changes, we raised the WACC to 12.11% (previous value: 11.85%). We lowered the company's target price by 4% to HK$5.78 through DCF valuation (sustainable growth rate 2%, HKD/RMB = 0.82), corresponding to FY22/FY23 PE by 12.15/10.30 times. Keep “buying.”
Risk warning: Authorities are tightening their supervision of tuition pricing; enrolment numbers are growing slowly.