The company's FY2022 performance was in line with expectations, with revenue up 31%, and adjusted net profit due to a high base-investment increase caused by debt restructuring income in the same period last year, which decreased 12% to 759 million yuan compared with the same period last year. At the same time, as the company will further increase its investment in running a school in the next two years, superimposing the right of holders of the company's convertible bonds to demand redemption in early 2024, or increasing the pressure on the company to repay its debts, the company announced that it would stop distributing FY2022 dividends to retain cash to support future capital expenditure and debt repayment.

The performance was in line with expectations, with an adjusted profit of 759 million yuan. 1) Revenue and profit: the company realized 3.043 billion yuan / + 30.9% revenue in fiscal year 2022. From a split point of view, the income from tuition / accommodation / other (employment, training, etc.) amounts to 2.50 million yuan. The company realized net profit / adjusted net profit of 446 million yuan, compared with 12.44% of the same period last year. The revenue growth is mainly due to the substantial increase in the number of enrollment of the company and the consolidation of newly acquired institutions (Shinawatra University Group and Shaanxi Siyuan College), while the decline in profit is mainly due to the company's increased investment in teaching facilities, additional teachers and enrollment, and the company recognized an one-time debt restructuring gain of 180 million in fiscal year 2021. 2) gross profit and expenses: the company's gross profit margin / adjusted gross profit margin reached 45.9% / 49.0%, compared with the same period last year. The decline in gross profit margin is mainly due to the increase in teachers' salaries and supporting equipment depreciation due to the improvement of teaching quality. The company's sales / administrative expense rate is 7.1%, 14.5%, compared with the same period last year + 0.8/+0.2pct. The sharp increase in sales expenses is mainly due to increased enrollment, and the increase in administrative expenses is mainly due to the integration of mergers and acquisitions institutions and the increase in teacher investment.

Long-term and short-term loans + convertible bonds reached 5.996 billion yuan, and the company stopped paying cash dividends to support future school investment and debt repayment. The financing cost of the company in fiscal year 2022 was 298 million yuan, which was the same as that in fiscal year 2021, and the financial expense rate reached 9.8%/-3pcts. As of August 31, 2022, the company's cash and bank deposits reached 3.034 billion yuan, short-term and long-term loans reached 4.124 billion yuan, convertible bonds reached 1.872 billion US dollars, and the company's debt-equity ratio was 51.2% / + 11.4pcts. In order to reduce the pressure on the company's short-term debt, on April 26, 2022, the company issued 800 million yuan of asset-backed bills through wholly-owned subsidiaries with a maturity of 3 years, using debt swap to optimize the debt structure. At the same time, the company announced that it would stop paying dividends for fiscal year 2022 and reserve cash for investment in running a school and debt repayment over the next two years.

The number of students in school continues to increase, of which the number of students in this / junior college is 27% higher than that of the same period last year. Split up, during the reporting period, the company's domestic schools contributed 2.696 billion yuan / + 34.3%, pre-tax profits 916 million yuan / + 81.0%, overseas universities (including Shinawatra and Yingdi schools) contributed 345 million yuan / + 9.4%, and pre-tax profits 6804 million yuan / + 152.2%. As of August 31, 2022, the number of students in school was 280453 / + 20.9%. According to educational background, the number of undergraduate / junior college / technician students is 143402 / 124905 / 12146 respectively, which is + 20.5% / 26.9% / 16.5% compared with the same period last year. As of August 31, 2022, the total number of beds in the company's school premises reached 305581 / + 19.1%, with a utilization rate of 91.8%/+1.3pcts.

The company may maintain high capital expenditure for the next two years to build a new campus & increase investment. 1) the new campus will provide increment: part of the capital expenditure will be used for the new campuses of Chongqing Zhongxian Digital Industry College, Shanxi Medical College and Jiangxi Vocational College. We expect Jiangxi Vocational College and Chongqing Zhongxian Digital Industry College to start in September 2023. 2) for existing schools, the company insists on high-quality development and increases investment in running schools: in fiscal year 2022, the company introduced more than 2400 teachers, with salary expenditure of 867 million yuan / + 49.9%.

In the next two years, the company may maintain a high capital expenditure for the upgrading of existing school hardware equipment, campus expansion and conversion and other investment.

Risk factors: changes in industry policy; the progress of mergers and acquisitions is not as expected; the conversion of independent colleges is not as expected; enrollment is not as expected; debt repayment and structural adjustment are not as expected.

Investment advice: taking into account the endogenous growth brought about by the company's enrollment growth and the increase in depreciation costs brought about by new facilities, we maintain the company's fiscal year 2023, downgrade fiscal year 2024, and increase core EPS forecast for fiscal year 2025 to $0.10, 0.11 and 0.13 yuan (compared with the original forecast of $0.13 for fiscal year 2024). With reference to the average valuation level of comparable higher education companies (China Kepei, Zhonghui Group, New higher Education Group, etc.) (with reference to the consensus expectation of wind, basically at 4-6 times PE), the company is given 6 times PE in fiscal year 2023, corresponding to the target price of HK $0.70, maintaining the "overweight" rating.