Neusoft Education released its interim results for 2022, with revenue of 744 million yuan, an increase of 24% over the same period last year, and an adjusted net profit of 232 million yuan, an increase of 90% over the same period last year. Both revenue and profit growth are in line with our previous expectations. We believe that the sharp increase in the company's profits is mainly due to the simultaneous increase in the volume and price of students and tuition fees in the higher education sector, as well as the explosive growth of the light assets business. At the same time, the company received an one-time operating government subsidy of 78.65 million yuan in 1H22. On the other hand, 1H21 has 19.18% minority equity and its base of return net profit is on the low side.

The volume and price of higher education business are on the rise. The revenue of the higher education sector in 1H22 reached 580 million yuan (up 23% from the same period last year), accounting for 78% of the total revenue. The increase in income is due to the increase in the number of students and the average tuition fees driven by the policy of high-quality schools. As of 1H22, the number of students at the company's three undergraduate colleges increased by 16.4% year-on-year to 45500. The strong internal growth was mainly due to the continued expansion of enrollment in 2021, with the total number of students reaching 16141 in the 22nd academic year. In the 22At 23 academic year, the total number of students in the company increased by 6% to 17128 students compared with the same period last year. In addition, as the provinces where the company runs schools have adopted the record system to liberalize tuition fees, the average tuition fee for the 22nd academic year is 22900 yuan, an increase of 8% over the same period last year. It is expected that the average tuition fees for higher education students will continue to rise in the future, and the income from higher education business is expected to reach 1.248 billion yuan in 2022.

The export income of light assets educational resources has soared. Neusoft's export business income of educational resources reached 68.92 million yuan in the middle of 22 years, an increase of 116% over the same period last year. The number of cooperative colleges of professional co-construction and industrial colleges has climbed to 65 and opened 253 cooperative programs, covering 18000 students. During the 1H22 period, the company optimizes the institutions with less than 100 students to further improve the quality of cooperative projects, and will continue to develop towards high-quality cooperation in the future. As the cooperation of sub-professional co-construction will last for 3-4 years, we believe that the number of students in Neusoft Education Co-Construction Specialty will also continue to climb, reaching 2.5 and 30000 respectively in 2022 and 2023, corresponding to 209 million yuan in 2022 educational resources export business income.

Continuing education business actively innovates to ensure the steady growth of business. The income of continuing education business increased by 14% to 66.13 million yuan in 1H22 compared with the same period last year. Although the offline opening of Neusoft Education's continuing education business was limited due to the epidemic in the first half of the year, the company actively developed vocational skills pre-job training business, thus ensuring the steady growth of To C training business and achieving an income of 22 million yuan. As the COVID-19 epidemic spread in various places in the second half of the year, the impact on the opening of continuing education is likely to continue. Therefore, we expect that the company's revenue from continuing education business will decline by about 14% to 105 million yuan in 2022 compared with the same period last year.

Keep buying. We believe that Neusoft's higher education business will continue to grow steadily, relying on excellent school quality and reputation, as well as the policy of expanding enrollment in higher education. In addition, the company's educational resources export business will drive the company's second growth curve. In the short term, due to the impact of the epidemic and changes in business strategy, we believe that the growth of continuing education business and digital factory business has slowed, but with the resumption of continuing education business, the expansion of light-funded production and the change of potential tax rates, we expect the company's adjusted net profit to reach 336 million yuan, 457 million yuan and 531 million yuan in 2022.2023 and 2024, respectively. We got the target price of HK $5.17 and maintained our buy rating.

Risk hint: higher education sector enrollment is not as expected; light assets business expansion is not as expected.