Revenue in the first half of fiscal year 22 increased by 5% compared with the same period last year, while adjusted net profit fell by 7% compared with the same period last year, which was lower than expected, mainly due to the increase in teaching costs.

Although the group is dominated by undergraduate schools, the gross profit margin fell higher than expected, mainly due to the company's business adjustment, and the long-term profit margin will remain stable.

The profit forecast is lowered to HK $2.1. If the cash dividend ratio of 50% is restored in fiscal year 23, the current dividend yield is 14%.

Growth slows, profit margins fall, and balance sheets remain robust

Yuhua's revenue in the first half of fiscal year 22 rose 5 per cent from a year earlier, but adjusted gross profit and adjusted net profit fell 12 per cent and 7 per cent respectively, lower than expected. The adjusted gross profit margin reached 58.4% in the first half of fiscal year 22, down 11 percentage points from the same period last year, mainly due to the increase in teaching costs (such as teachers' costs and student scholarship costs). The management said that as the higher education business continues to invest, the gross profit margin will stabilize at the current level in the future. The balance sheet remained robust, with total liquidity reaching 3.2 billion yuan in the first half of fiscal year 22, with a net cash / debt ratio of 17% (convertible bonds are regarded as liabilities).

Slow growth to seek long-term sustainable development

Yuhua plans to convert three Kmuri 9 schools into vocational colleges, one of which is already waiting for approval, but we think the progress of the other two will be based on the success of the first one. In the past, the company planned to further upgrade these vocational colleges to professional undergraduates, but for now, we think this process may take a long time. In addition, the expansion of Hunan school campus has also been delayed. We believe that these delays will be a drag on its growth prospects, but the positive factor is a reduction in capital spending, which will be good for the balance sheet.

The valuation is low, and it will be good to restart the dividend.

Yuhua has suspended cash dividends since the second half of fiscal year 21, and there is no sign that the company will resume dividend payouts. If Yuhua can restart the dividend in fiscal year 23 and maintain a dividend yield of 50%, the current dividend yield is 14%, while Yuhua's current forecast price-to-earnings ratio for fiscal year 22 is only 4 times, so we think that resuming the dividend payout will be a positive catalyst. We cut our forecast core net profit for fiscal year 23 by 21% and 29% respectively to reflect recent results and more aggressive assumptions about tax rates. Our target price has been lowered from HK $3.6 to HK $2.1, based on a price-to-earnings ratio of 6 times earnings over the next 12 months (down from 8 times previously). The target price corresponds to 6x / 6x 22max / FY23 forward P / E ratio.

Main risks: 1) increase in the number of students / tuition fees; 2) higher-than-expected costs / fees associated with for-profit registration; 3) regulation.