Yuhua Education announced interim results for fiscal year 22, with revenue of 1.204 billion yuan (up 4.8 per cent year-on-year) and adjusted net profit of 576 million yuan (down 7.3 per cent from the same period last year). If you refer to the original performance announcement of the business that did not exclude grades 1-9 in the middle of fiscal year 21, the revenue fell 12% compared with the same period last year, and the adjusted return net profit decreased by 17%. The growth of the company's revenue is in line with our expectations, and the profit growth rate is lower than we expected. The decline in profits is mainly due to the company's increased investment in faculty, campus and teaching in order to improve the quality of teaching, resulting in a 38.5% increase in the cost of the company's main business compared with the same period last year.

The business of higher education develops steadily. In the first half of fiscal year 22, the contribution income of higher education business was 1.09 billion yuan, an increase of 8% over the same period last year. The expansion of higher education business income was mainly due to an increase of about 3% in the number of students from 114000 in the 21st academic year to 118000 in the 22nd academic year. The average tuition fee also increased slightly in the same period. In addition, we expect that one of the company's three new higher vocational colleges will start enrolling students in the 22max 23 academic year, and two will start recruiting students in the 23max 24 academic year. According to the plan, when the three schools mature, the number of students in each school will reach 12000. Based on the assumption that the enrollment plan of a single school will reach 5000 in the fourth year of running a school, with an enrollment rate of 80%, we expect that the enrollment of the three higher vocational colleges will reach 11800 in the fifth year. We estimate that in the fifth year of the three schools, the average tuition fee is expected to reach 16700 yuan. As a result, each school will achieve an income of 197 million yuan. With the investment of three new higher vocational colleges, we expect the number of students in Yuhua Education to reach 123000 in the 23rd 24 academic year, representing a compound growth rate of 2.3% in three years.

Quality improvement drives costs up. 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. Yuhua Education increased its investment in teachers and campus construction in the first half of fiscal year 22, and its main business cost increased by 38.5% year-on-year to 520 million yuan. Among them, the salary cost of employees increased by 16.1% to 294 million yuan compared with the same period last year, mainly because the company raised the average salary level of teachers, and the number of teachers was 4834, basically the same as the same period last year. The expenditure on student training and scholarship was 75.56 million yuan, an increase of 23.5% over the same period last year. Office expenditure increased by 90% to 48.87 million yuan. Rising costs caused the company's gross profit margin to fall 12% year-on-year to 682 million yuan, while gross profit margin narrowed 10.9% year-on-year to 58.4%. Looking ahead, due to the continuation of the company's high-quality development plan, we believe that the higher cost will continue, thus putting pressure on the gross profit margin. We expect Yuhua Education's gross profit margin for the fiscal year 22-23-24 to be 58.7%, 56.8% and 56.4%, respectively.

Cost control is still strict, and the advantage of collectivization in running a school is highlighted. In the middle of fiscal year 22, Yuhua education's expenses were still strictly controlled, with sales expenses down 28% and administrative expenses down 1.8% year-on-year. Due to the company's collectivization management of M & An institutions, strict cost control, and the gradual release of the integration effect after investment, the group's sales and administrative expenses accounted for 10.2% of the income, down 1.3 percentage points from the same period last year.

Thanks to expense-side management, the company's adjusted net profit was 47.8% in the middle of fiscal year 22, down 6.3 percentage points from a year earlier, less than the decline in gross profit margin. We believe that the space for post-investment integration of M & An institutions in the future is limited, and the decrease in fees will be gradually reduced. Therefore, we expect the group's adjusted net interest rate for the fiscal year 22-23-24 to be 47.8%, 45.8% and 45.0%, respectively.

Keep buying. As high-quality development planning drives up costs, and the efficiency of higher education business is close to the extreme level, we believe that the company's performance growth will slow in the future. We downgrade our forecast for adjusted homing net profit for the fiscal year 22-23-24 to RMB 1145max 1.30pm 1.89 billion. We lowered our target price to HK $2.14 to maintain buying.

Risk hint: the approval progress of higher vocational colleges is not as expected; the enrollment of new schools is not as expected.