Investment suggestion
The company announced that its performance income for fiscal year 2022 was 3.04 billion yuan, an increase of 31% over the same period last year, and its adjusted net profit was 757 million yuan, down 12.6% from the same period last year. The company's performance is in line with market expectations. We believe that due to high-quality development, the company has increased investment in running a school, which is a drag on profits in the short term, and in the face of pressure on convertible debt repayment and capital requirements such as campus expansion, the company announced the suspension of dividends, and we downgraded the rating to neutral, lowering the target price by 11% to HK $0.62, corresponding to 4.5 pounds, 4.0 times 23 pounds, adjusted EV/EBITDA for fiscal year 24.
The reasons are as follows:
Short-term debt service and expansionary capital expenditure put pressure on funds. As of the end of fiscal year 2022, the company's cash and equivalents were 3 billion yuan, and the total interest-bearing liabilities (including convertible bonds) totaled 6 billion yuan. The company announced that it decided not to pay dividends for the 2022 fiscal year, mainly considering that the company has a large demand for funds in the short term, including: 1) the 2.3 billion yuan convertible bonds issued by the company in 2021 can be redeemed in March 2024, and the company needs to reserve and repay the necessary funds; 2) the institutions acquired by the company and the schools facing the conversion of independent colleges still need to increase investment and improve their schools. 3) three new higher vocational colleges under the company have been included in the 14th five-year Plan of the Ministry of Education, and additional investment is needed to ensure that the school year starts as scheduled in September next year. In fiscal year 2022, the company purchased fixed assets, intangible assets and prepaid land capital expenditure of 2.34 billion yuan. We believe that in the short term, the company will face both campus expansion and debt repayment needs, and the capital side will be under pressure.
Increasing investment in running a school will affect the level of profit margin in the short term. The company's revenue grew steadily. Revenue in fiscal year 2022 increased by 31% compared with the same period last year. By October 2022, the number of students in school exceeded 280000, an increase of 21% over the same period last year. But on the profit side, the company's gross profit margin for fiscal 2022 was 45.9%, down 4.7ppt from the same period last year, mainly due to the company's continued efforts to introduce quality teachers, and teachers' salary costs increased by 49.9% compared with the same period last year. In fiscal year 2022, the adjusted net profit was 757 million yuan, down 12.6% from the same period last year, and the adjusted net profit margin was 25%, down 12.4ppt from the same period last year. We believe that in the short term, the company will focus on improving the quality of running schools, expanding the campus, costs and related amortization may increase the drag on profit margins.
What is the biggest difference between us and the market? The company has a lot of room for endogenous growth, but in view of the company's current capital pressure, it suspends dividends and is cautious about its future cash flow capacity and debt repayment ability.
Potential catalyst: pay attention to the for-profit registration of private colleges and universities; the progress of convertible debt repayment.
Profit forecast and valuation
Taking into account the strong growth in the number of students, we raised our income and adjusted net profit for fiscal year 23 by 10% and 5% to 3.7 billion and 890 million yuan, and introduced an income of 4.25 billion yuan and an adjusted net profit of 1 billion yuan for fiscal year 2024. In view of the financial pressure on the company, such as debt repayment and campus expansion, we downgraded to neutral and switched to the valuation for fiscal year 2023. Due to the increase in net debt, we lowered the target price by 11% to HK $0.62, corresponding to the adjusted EV/EBITDA in fiscal year 24, which is 4.5 gamut, which is 7% higher than the current share price. The current share price corresponds to 3.1max 2.7x 23max FY24 EV/EBITDA.
Risk
The application for for-profit classification of schools is uncertain, and the increase of enrollment and tuition fees is not as expected.