The results in the first half of fiscal year 22 showed solid profitability.

Driven by the merger of two newly acquired schools (Harbin School and Huaibei School), Kopei's income in the first half of fiscal year 22 increased by 41% compared with the same period last year, accounting for about 62% of the income increase in the first half of fiscal year 22. Similar to the situation in the industry, the group increased spending to improve the quality of teaching, and gross profit margin fell 3.0 percentage points year-on-year to 64.9% (compared with 68.0% in the first half of fiscal 21). Affected by the decline in gross profit margin and the group's higher tax rates in preparation for for-profit registration, overall adjusted net profit increased by 17% year-on-year, with an adjusted net profit margin of 55.1% (down 11.5 percentage points from 66.6% in the first half of fiscal 21). Kopei's balance sheet remained robust, with a net debt ratio of 12 per cent, and declared an interim dividend of HK $0.06 per share, with a dividend yield of 26 per cent, consistent with the previous one, with an annualised dividend yield of 5.7 per cent.

The prospect is good. Maanshan School will be listed in the second half of fiscal year 22.

We expect the core net profit of Kepei to grow at a compound annual rate of 12% in the 21-23 fiscal year, which is mainly driven by: 1) the endogenous growth of existing schools. Kopei plans to buy a new piece of land for its Guangdong school; 2) Maanshan school will be consolidated from the second half of fiscal year 22 and is expected to contribute about 20% of its incremental income for fiscal year 22; and 3) the profit margin of newly acquired schools will improve. Kopei insists on a high-quality undergraduate-based strategy that will continue to support its internal growth: 1) adjust the enrollment structure, increase undergraduate enrollment, strategically reduce junior college enrollment; 2) increase undergraduate and secondary vocational counterpart enrollment; 3) increase investment in teaching facilities / faculty / campus. Management revealed that capital expenditure on inclusive education and teaching will reach 150 million to 200 million yuan in the next few years.

Maintain a buy rating with solid fundamentals and attractive valuations

Due to lower profit margins as a result of increased investment and more aggressive tax assumptions, we cut our core net profit by 7% for fiscal 22 and 15% for fiscal 23. Based on a price-to-earnings ratio of 8 times earnings for the next 12 months (down from 11 times previously), the target price is lowered from HK $5.7 to HK $3.8, corresponding to 8.5 times / 7.7 times 22x22 earnings and 4.7% dividend yield for fiscal 22. The main risks are: 1) the increase in the number of students / tuition fees; 2) for-profit registration costs / fees are higher than expected; 3) regulatory risks.