1H22 is expected to grow by 20%.
Zhonghui Group's 1H22 revenue was 410 million yuan (the same below), an increase of 48.4% over the same period last year. Excluding the impact of this year's merged Chinese technician college and 1H21's Sichuan schools, we expect the company's endogenous income to grow by about 20% year-on-year. The income of higher vocational education and secondary vocational education in 1H22 increased by 32.7% and 695.3% respectively compared with the same period last year. During the period, the company's gross profit margin remained stable to 50.2%, in line with expectations. However, the company's operating expenses increased significantly, and sales expenses and administrative expenses increased by 269% and 94% respectively in 1H22 compared with the same period last year, mainly due to the company's expansion of the publicity of enrollment activities, the expansion of business development expenses and the increase in the salary of executives, as well as the comprehensive consolidation of Sichuan City Vocational College and technician College (1H21 only shows 2-month results). Sales / administrative expenses accounted for 20.9% of revenue, up from 15.0% in the same period last year. The 1H22 net profit of the company was 250 million yuan, an increase of 52.5% over the same period last year, and the net profit was 30.5%. The company pays an interim dividend of HK $0.084, with a dividend yield of 30 per cent.
Higher profit margins in the second half of the year
In the first half of the year, 5500 students in China enjoy the domestic and foreign integration programs provided by the company's overseas schools, and they can still get the characteristic international education courses of their schools if they do not go abroad. There were 76000 students in the 202111 22 academic year, and the management estimated that the FY22E income was 1.65 billion yuan, an increase of 30.3% over the same period last year, mainly driven by the low base effect of the two schools in Sichuan. We estimate that the FY22E income of Sichuan schools is 380 million, accounting for 23% of the company's total revenue. The company said that non-academic education enrollment peak in March-August, operating expenses in the second half of the year will be less than the first half of the year, profit margins will be slightly higher than the previous month, so it will help to increase revenue in the second half of the year. In the future, the company will continue to increase the connotation of the company, improve campus facilities, enrich industry-education integration projects, and improve the quality of running a school.
Reduce FY22E net profit forecast by 7.0%; target price HK $3.80 due to the company's increased investment in faculty and operating expenses, we cut FY22E/23E gross profit by 1.4% 2.1 percentage points; reduce FY22E/23E net profit forecast by 7.3% to 500 million / 600 million yuan, a year-on-year increase of 21.6% and 19.2%. The current share price corresponds to 4.9x / 4.1x FY22E/FY23E P / E, and our target price is adjusted to HK $3.80x, corresponding to 7x FY22E P / E forecast.
Investment risk
The uncertainty of choosing to be a "for-profit" school and the uncertainty of the number of places given by the government to private application schools.