Zhonghui Group reported mid-year income of 823 million yuan in fiscal year 22, up 8% from the same period last year, while its adjusted net profit was 264 million yuan, up 32% from the same period last year. Both revenue and profit growth are in line with our previous expectations. The sharp increase in income is mainly due to the increase in students and tuition fees, as well as the merger of the newly acquired Sichuan City Vocational College, technician College and Chinese Business Technical College. In addition, Zhonghui announced an interim dividend of HK8.4 cents per share, and shareholders can choose to receive the dividend in the form of shares or cash. If the interim dividend yield of the company is calculated on the basis of cash dividend, it is 6.5%.

The regional advantage of the Greater Bay area is prominent, and the endogenous growth is still strong. As the number of applicants for the college entrance examination in Guangdong Province is rising year by year, reaching 783000 in 2021, the gross enrollment rate corresponding to the higher education age population is only 52%, which is about 5.8 percentage points lower than the national average of 57.8%. As a result, higher education institutions in the province can still enjoy the benefits of increased enrollment plans. In the 22nd academic year, the number of students at Zhonghui's Chinese Business College and Chinese Business Vocational College increased by 6.8% and 29.3% respectively compared with the same period last year. At the same time, due to the positioning of the company's high-quality school and the liberalization of tuition pricing restrictions in Guangdong and Sichuan provinces, freshmen's tuition fees rose again in the 22nd academic year, leading to an increase in average tuition fees. As a result, Zhonghui's endogenous income still grew by about 25% in the first half of fiscal year 22. The company is actively expanding the campus to meet the growing needs of students. at the same time, compared with the average training expenses for public junior college students (36000 yuan and 21000 yuan), tuition fees are expected to increase steadily, and the logic of group volume and price increase is still stable.

Gross profit margin is stable, mergers and acquisitions drag on net profit margin. In the middle of fiscal year 22, the company's gross profit margin was 50.2%, an increase of 0.2% over the same period last year; the adjusted net profit of the company was 32.1%, down 4% from the same period last year. The decline in the adjusted profit margin is mainly due to the high administrative costs of Sichuan City Vocational College, technician College and Chinese Business Technical School acquired by the Group in the past 21 years. Administrative expenses increased by 94% in the first half of fiscal year 22 compared with the same period last year. It is worth noting that since the company merged only two months' earnings of the two universities in Sichuan in the middle of fiscal year 21 and six months in mid-22, the impact of new merged institutions with low profit margins on profit margins became apparent in the middle of 22 years. We believe that with the deepening of the company's post-investment management, the administrative expenses of M & An institutions are expected to return to a reasonable level, and there is room for further repair of group profit margins. In addition, the company is actively carrying out vocational training business, driving other income to grow by 130% year-on-year, accounting for 5.1% of revenue, an increase of 1.8% over the same period last year. With the development of vocational training business, the high growth of other income is expected to boost the group's profit margin.

Keep buying. We believe that the excellent geographical layout of the company's colleges and universities will receive the development dividend of areas with scarce educational resources, cooperate with the continuous expansion of the new campus, and ensure the continuous growth of students. At the same time, the group's high-quality school strategy will also promote the increase of tuition fees, and endogenous growth is worth looking forward to. However, due to the pressure on group fees caused by the new M & An institutions, post-investment integration remains to be seen. As a result, we have lowered the company's adjusted net profit forecast for the fiscal year 22-23-24 to RMB 665 million. The corresponding earnings per share is 0.52 soybean 0.71 yuan. We lowered our target price to HK $3.35 to maintain our buy rating.

Risk hint: the decline in brand strength and word of mouth led to a decline in enrollment plans; tuition fees were raised less than expected.