Revenue increased 29% year-on-year in the first half of '22, in line with expectations. Net profit after the report was adjusted fell 18% year-on-year, mainly due to increased costs and investment to improve the quality of teaching

Management says it will enter a phase of increased investment in the next few years to improve the quality of teaching and thereby promote long-term growth

Maintaining the buying rating: The valuation is attractive, and the target price falls to HK$1.1. Results for the first half of '22 are mixed

It is hoped that revenue for the first half of '22 will increase 29% year-on-year to 1.5 billion yuan, in line with consistent forecasts. Gross margin fell 3.5 percentage points to 50.7% year on year, mainly due to: 1) the desire to hire more high-level talents and introduce small classes to reduce the student-teacher ratio, which led to an increase in teachers' remuneration costs; 2) increased investment in teaching equipment and campus facilities, which led to an increase in depreciation expenses. The core operating profit margin also fell 6.3 percentage points to 36.0% year on year. Mainly due to falling gross margin and higher sales expenses due to overseas recruitment activities, the overall impact report adjusted net profit margin fell 16.9 percentage points to 29.3% year on year, and the adjusted net profit margin of the report fell 18% year on year.

Entering the stage of increasing investment

In response to the policy's call for vocational education and high-quality development, it is hoped to increase investment. Capital expenditure for renovation and expansion reached 1,551 billion yuan in the first half of '22 (compared to 928 million yuan in the first half of '21). At the same time, it hopes to optimize its debt structure and repay some bank loans, reducing overall cash on hand from RMB 4.5 billion as of August 2021 to RMB 934 million in February 2022. As of February 2022, Hope also switched from net cash to net debt, with a net debt ratio of 14%.

The basic outlook is stable, and valuations are attractive

We expect core earnings to grow at a compound annual rate of 22% in fiscal year 21-23, driven by: 1) endogenous growth in domestic institutions; 2) increased overseas enrollment after the pandemic; 3) quality improvements driving tuition increases.

It is hoped that the price-earnings ratio currently predicted for FY22 is 4.2 times, and the predicted dividend yield for FY22 is 6.6%. It is hoped that the 30% dividend policy will also remain unchanged. As a result of increased investment and more aggressive tax rate assumptions, we lowered our core earnings for fiscal year 22/23 by 19% and 21%, respectively, and lowered the target price from HK$2.3 to HK$1.1, based on an 8x forward-looking price-earnings ratio over the next 12 months (down 15 times from the previous 15 times). Our target price corresponds to 9.6 times/7.9 times the projected price-earnings ratio for fiscal year 22/23 and the predicted dividend yield of 3.1% for fiscal year 22. Key risks: 1) increased tuition fees and student numbers; 2) costs/expenses associated with for-profit registration exceed expectations; 3) policy risk.