New Higher Education Group announced mid-term revenue of RMB 1,152 million for fiscal year 23, up 11% year on year; Guimu's net profit was RMB 391 million, up 13% year on year. Both revenue and profit growth are in line with our previous expectations. We believe that the increase in the company's revenue is mainly driven by the Group's steady endogenous growth and increases in tuition and accommodation fees. At the same time, the New Higher Education Group announced an interim dividend of $0.119 per share, with a payout ratio of 48%.

Endogenous growth has led to a steady increase in income. As the company optimized the student structure, the number of students enrolled in the New Higher Education Group reached 141,000 in the 22/23 school year, a decrease of 2% over the previous year. Among them, the number of undergraduate students enrolled increased dramatically, reaching 510,000, an increase of 12% over the previous year, accounting for 36% of the total number of students enrolled, accounting for an increase of 6 pcts. We believe the undergraduate level has two advantages over college: 1) the tuition fee standard is higher; 2) the demand for studying at the undergraduate level is more stable and there is less competition for admissions. As a result, in the middle of fiscal year 23, the average tuition fee of the New Higher Education Group reached 14,800 yuan, an increase of 11% over the previous year. We expect the Group's revenue to reach 2,087 billion yuan in fiscal year 23, an increase of 8.6% over the previous year.

Profit margins have steadily rebounded. In the middle of fiscal year 23, as the Group adhered to a high-quality content development strategy and continued to increase investment in personnel and facilities, personnel costs increased 19.4% year on year, depreciation and amortization costs increased 13.6% year on year, exceeding revenue growth. As a result, the gross margin of the New Higher Education Group fell 0.9 pcts year-on-year to 39.3% in the middle of fiscal year 23. Furthermore, the effect of running schools in groups was further highlighted. The ratio of administrative expenses to revenue fell 1.8 pcts to 3.9% year on year, which led to an increase in profitability. The net interest rate of the mother increased 0.6 pcts year on year to 33.9%. Looking ahead, we believe that as the Group's core construction is gradually completed, hardware investment declines, growth in main operating costs will slow down, and gross margin and net interest rates can be expected to increase further.

Classification management of private colleges and universities is gradually being implemented. Northeast School (Harbin Huade College) and Guangxi School (Guangxi Yinghua International Vocational College), which are part of the New Higher Education Group, obtained permission to operate for-profit schools during the transition period in August and December 2022, respectively. Schools in Yunnan and Guizhou are also going through the relevant formalities. We believe that group colleges will face the following changes after registration becomes for-profit: 1) Tuition price increases will no longer be restricted, and market-based adjustments can be made according to the quality of operation of the institutions themselves and interbank prices. 2) The tax rate will be changed from the original tax exemption to a preferential tax rate (“Civil Promotion Law (Enforcement Regulations)”). We expect it to be 15%. 3) Related transactions are not restricted, and there is no risk of being restricted (there are currently no restrictions on transactions related to non-profit schools at the higher education level). Furthermore, the New Higher Education Group's high-quality schooling strategy will also help its institutions make for-profit choices.

Maintain the buy rating. Benefiting from the New Higher Education Group's high-quality schooling strategy, we believe the company's average tuition fees are expected to maintain a compound annual growth rate of 6.4% in the 22-25 fiscal year. Furthermore, as its institutions are approved for for-profit conversion one after another, market concerns about the VIE structure and other aspects will be significantly alleviated. As the company's cost growth rate is expected to slow and cost control is further deepened, we raised the Group's net profit for fiscal year 23/24/25 from 781/9.15/1,035 million yuan to 794/99/1,051 million yuan. We raised our target price to HK$3.46 to accommodate a 30% increase and maintain our buying rating.

Risk warning: Tuition price increases fell short of expectations; progress in for-profit conversion of institutions fell short of expectations.