The process of changing junior high school to junior college has slowed down, increasing investment to improve teaching quality, profit margin or pressure Yuhua Education announced 1HFY22 results on April 29, income is 1.2 billion yuan (up 4.8% year-on-year), which is 47% of our FY22 revenue forecast, which we think is in line with expectations. Due to the company's expansion of investment in teachers and campus facilities, gross margin / adjusted net profit margin fell by 10.6 percentage points to 56.6% and 47.8% compared with the same period last year. We expect tuition fees to rise moderately, taking into account the company's continued increase in teaching quality investment, the slowdown in the transformation of its three K9 schools to junior colleges, and the increase in future junior college enrollment fees, we will reduce the FY22/FY23/F24 homing net profit to RMB 997 million / 1.092 billion / 1.28 billion (previous value: RMB 1.223 shock 14.181,723 billion) And reduce the target price based on DCF to HK $4.35 (previous value: HK $6.51, WACC raised to 12.57% from 9.98%, sustainable growth rate of 1% HK $1 = RMB 0.84). Maintain a "buy" rating.
The increase in tuition fees is expected to be more moderate. The income of the first junior college may increase slightly with the opening of Yuhua 1HFY22 in FY23. We analyze that the tuition fees of many schools under the main departments continue to rise.
In the short and medium term, Zhengzhou Industrial and Commercial College is affected by the upper limit of tuition fees in Henan Province, and there is no plan to raise fees in the short term, and there is still uncertainty about the space for tuition fees to be raised in the provinces where other schools are located. Therefore, we conservatively estimate that tuition fees for universities and colleges in Yuhua will increase slightly by 3% a year in the next 3-5 years. In addition, Yuhua plans to transform its three K9 schools into junior colleges after FY21 divested its K9 school business. As of 1HFY22, the progress of the transformation is slower than we expected, and Yuhua predicts that only one college is more likely to open in FY23. Therefore, we adjust the forecast and assume that the other two junior colleges will be postponed until FY24 is put into use. To sum up, we expect the total number of students in the company to grow by about 12% a year in the next 3-5 years.
Medium-and short-term capital expenditure and sales expenses may remain at a high level
In addition to the lower-than-expected progress of the transfer schools, the progress of the campus expansion of Hunan Institute of Foreign Economics (HIEU) is also slower than expected due to changes in the policy environment and epidemic prevention and control restrictions, so we postpone the total capital expenditure of about 2.2 billion yuan for HIEU and two junior colleges to FY23 in the model.
Although the overall gross profit margin may be affected by the increase in teaching investment and the slowdown of school transformation in the short term, it is expected to recover gradually with the release of economies of scale. Considering the high enrollment cost of the new junior college, we expect the company's sales expense rate to rise to about 7% and 8% in the next 3-5 years.
Profits are under pressure in the short term, maintaining a "buy" rating
As the investment sentiment of the higher education sector is affected by the overall downturn of the education sector, the current level of PE is relatively low, so we think that the DCF valuation can better reflect the reasonable value of the company. Considering that the increase in tuition fees is expected to be more moderate, the investment in teaching quality will be improved, the opening time of junior college may be delayed, and the cost of enrollment and sales of junior college students will increase in the future, we reduce the company's net profit to RMB 9.97x102pm 1.280 billion (previous value: RMB1.223pm 1418,723), and lower the target price to HK $4.35. Maintain "buy".
Risk hint: the growth rate of the number of students is lower than expected, the progress of campus expansion is slow, the opening of junior colleges is delayed, and the control of tuition pricing is tightened.