It is hoped that Education will report a mid-year income of 1.53 billion yuan (up 29% year-on-year) and an adjusted net profit of 453 million yuan (down 17% from the same period last year). Revenue growth is in line with our expectations, but the growth rate of adjusted net profit is lower than we expected. The profit decline is mainly due to the high-quality school concept put forward by the company, resulting in a 39% year-on-year increase in revenue and cost compared with the same period last year. At the same time, due to the 180 million reversal impairment loss produced by Yinchuan Energy Institute in the same period last year, the company had a high base last year. Net profit increased by 24% compared with the same period last year.

The effect of collaborative enrollment at home and abroad is prominent. The number of students enrolled in the company in the 22nd academic year reached 232000, an increase of 18% over the same period last year, of which undergraduate and junior college students increased by 21% and 23% respectively. We believe that on the one hand, the high increase in the number of students is due to the growth of junior college students brought about by the 3 million enrollment expansion of higher vocational colleges over the past 3 years, on the other hand, the company innovated the mode of domestic coat reading after the acquisition of Yindi University in Malaysia. "domestic college admission, overseas undergraduate graduation", "domestic undergraduate admission, overseas graduate graduation" slogan, thus forming a differential enrollment with the same industry. It led to a 15% year-on-year increase in new enrollment to 82000, of which about 20, 000 were students participating in overseas enrollment programs. Since Yingdi University can enroll about 60,000 international students after obtaining the KDN license, the company also made efforts to locate Southeast Asia in the 22nd academic year. During the performance period, the enrollment of Yingdi increased by 43% compared with the same period last year, and the enrollment of Shinawatra University in Thailand increased by 24%. We believe that the company's coordination at home and abroad will continue to enable the recruitment of students. It is estimated that the number of new students will reach 110000 and the number of students will exceed 293000 in the 24th academic year, with a three-year compound growth rate of 16.5% and 14.7% respectively.

High-quality development drives up costs. As a result of the opinions on promoting the High-quality Development of Modern Vocational Education issued in October 21, the evaluation standards of teaching quality in various places are suggested. It is hoped that education will also put forward the concept of high-quality development in the 21st year, and update the school buildings of its colleges and universities in the first half of fiscal year 22 to supplement the team of teachers and increase teachers' salaries. During the performance period, the company's expansion expenses increased 67% year-on-year to 1.55 billion yuan, and teachers' salary expenditure increased 48% year-on-year to 388 million yuan. The company hopes to maintain the student-teacher ratio at 18:1 required by the Ministry of Education during the 14th five-year Plan period (about 19.8 in fiscal year 21). In addition, due to the input of the admissions team and the consolidation of the six M & A universities, the company's sales and administrative expenses increased by 61% and 32% compared with the same period last year. Rising costs caused the company's 1H22 gross profit margin to fall 3.5 percentage points year-on-year to 50.7%, superimposed by the 180 million reversal impairment loss generated by Yinchuan Energy Institute last year, resulting in a high base, the group's adjusted net profit margin fell 16.5 percentage points year-on-year to 29.7%. Looking ahead, due to the continuation of the company's high-quality development, we believe that higher costs will continue, and we expect the company's gross profit margin to reach 45.2%, 46.7% and 46.3% in the fiscal year 22-23-24.

Keep buying. We believe that the continuation of the company's post-investment integration will lead to the recovery of profit margins. However, the high cost of the high-quality strategy and the cost of the admissions team will remain high. As a result, we have lowered our adjusted net profit forecast for the fiscal year 22-23-24 to RMB 700 million / 810 million / 920 million, corresponding to the forecast of earnings per share of 0.09exp 0.10exp 0.12. We lowered our target price to HK $1.38 to maintain buying.

Risk tips: post-investment integration is disadvantageous, cost control is difficult; the epidemic led to a decline in demand for overseas students, affecting the enrollment of domestic coat reading program.