FY22's performance was relatively stable; the repayment risk of convertible bonds was temporarily lifted, and the dividend and upgrade and expansion investment in Yuhua Education FY22 (as of August 31, 22) achieved an income of 2.38 billion yuan (yoy+5.39%). The gross profit margin decreased to 59.61% compared with the same period last year due to increased investment in high-quality schools, and the adjusted net profit was 1.24 billion yuan (yoy-1.9%). In January 23, the company was agreed by its creditors to waive the immediate repayment of principal and interest and default interest on the remaining convertible bonds due in 24 years. We expect that in the short term, the company's funds will give priority to repaying / redeeming convertible bonds, suspending campus expansion and new junior colleges, and the company is expected to resume dividends after for-profit registration and repayment of convertible bonds. We expect the company's FY23/FY24/FY25 homing net profit to be 1.061 billion yuan, with a target price based on DCF of HK $2.38 million (WACC rose from 12.57% to 19.27%, with a sustainable growth rate of 1%, and HK $0.88 to RMB, corresponding to 5.89x FY23E PE). Maintain a "buy" rating.
The remaining convertible bond conversion share price is reduced to HK $1.65 and the company may forcibly redeem / require the conversion according to Yuhua's announcement on January 12 and 19, 23 and the results on February 28, according to the revised terms and conditions of the convertible bonds: 1) the company is required to redeem the convertible bonds with a total principal of HK $500 million (completed) before January 30, 23. 2) bondholders with a total remaining principal of HK $974 million agree to exempt existing or potential defaults, including non-payment or non-payment of interest on default. 3) the conversion share price is adjusted to HK $1.65 per share. 4) if the company gives notice within not less than 30 days and not more than 60 days, it shall have the right to redeem all remaining convertible bonds at any time at face value; if the weighted average share price exceeds 130% of the conversion price (HK $1.65) on at least 20 trading days in a row, the company has the right to force bondholders to convert shares.
Income increased compared with the same period last year, investment in running schools increased; or delayed campus expansion and construction of new junior colleges Yuhua Education FY22 achieved an income of 2.38 billion yuan (yoy+5.39%); under the guidance of the national high-quality school policy, the company increased the number of teachers, student training and scholarships, school maintenance and other expenses, so the gross profit margin decreased 7.63pct to 59.61% compared with the same period last year. We have observed that the progress of FY22's capital expenditure related to the construction of junior colleges and Hunan Institute of Foreign Economics is relatively slow, and considering that the location of the company's school does not have a clear for-profit registration schedule and the need to give priority to repaying or redeeming the remaining convertible bonds, we expect the company to suspend the construction investment in the branch campus of Hunan Institute of Foreign Economics and the two newly-built colleges and universities in Luohe and Jiaozuo. Therefore, we adjust the total number of FY23/FY24/FY25 students and capital expenditure assumptions accordingly.
Lower the target price to HK $2.38 and maintain the "buy" rating
We expect the company's FY23/FY24/FY25 homing net profit to be 1.278 billion yuan, and we increase the WACC to 19.27% according to market changes, corresponding to the DCF target price of HK $2.38 (the previous value is HK $4.35, the sustainable growth rate is 1%, and the Hong Kong dollar is 0.88 yuan). Maintain "buy".
Risk tips: high-quality investment in running a school leads to a decline in profit margins, slow progress of for-profit registration, and insufficient overseas fund-raising.