Revenue grew steadily, the cost structure was gradually optimized, and New Higher Education Group 1HFY23 achieved revenue of 1,152 million yuan (yoy +11.2%) and net profit of 391 million yuan (yoy +13.1%). Revenue and Gumo's net profit was 54.26%/58.29% of our previous FY23 full-year forecast, respectively. We believe revenue was in line with expectations, and Guimu's net profit slightly exceeded expectations, mainly due to the company's continuous optimization of the cost structure, gross margin and expense ratio improving month-on-month. The company announced a dividend of RMB 0.119 per share, with a dividend rate of about 48%. Considering that the company's revenue is steady and the cost and expense side is expected to be further optimized, we raised the FY23/24/25 net profit forecast to $706/796/870 million (previous value: RMB 670/717/$784 million), and at the same time lowered WACC to 13.80% (previous value: 14.16%) based on market changes, obtaining a target price of HK$5.31 based on DCF (sustainable growth rate of 2%, HKD/RMB 0.88). Keep “buying.”
Continuously increasing investment in running schools and deepening the integration of industry and education, 1HFY23, which has outstanding vocational education characteristics, invested about 352 million yuan in capital expenditure to comprehensively upgrade teaching hardware such as school buildings, experimental training rooms, and teaching equipment such as smart blackboards; the company continued to raise salaries for core positions such as highly educated and highly qualified teachers and increased investment in teacher training. Labor costs increased 19.4% year-on-year. In terms of integrating industry and education, according to the professional characteristics of each college, the company cooperated with well-known enterprises to establish industrial colleges such as information technology, intelligent manufacturing, and refractory materials, and achieved differentiated applied talent training. Through the above content construction, the company achieved remarkable results in high-quality employment. As of December 31, 2022, the implementation rate of the company's 2022 graduates in employment was as high as 95.6%, of which the number employed by famous enterprises increased by 187%. We believe that in the long run, increasing investment in content construction will help strengthen the characteristics of the company's vocational education, improve the quality of teaching, and achieve stable and sustainable endogenous growth.
Gross margin improved slightly month-on-month, and further optimization on the cost side is expected
The company continuously optimizes the cost and expense structure: 1HFY23's gross margin was about 39.29%, up 1.60 pct from 2hFy22, showing a steady trend; administrative expenses fell 23.4% year on year, and the administrative expenses rate decreased 1.76pct year on year; 1HFY23 Company repaid bank loans with higher interest rates early, and the interest-bearing debt ratio fell to 31.6% from 36.7% of FY22. We expect FY23 Group's overall financing costs to decrease further. In summary, we raised our net profit forecast for FY23/24/25 to RMB 706/796/870 million (previous value: RMB 670/717/784 million).
Target price of HK$5.31, maintaining “buying”
Taking into account market changes, we lowered WACC to 13.80% (previous value: 14.16%) and raised the target price based on DCF to HK$5.31 (previous value: HK$4.05, sustainable growth rate 2%, HKD/RMB = 0.88), corresponding to 10.30x FY23E PE. Keep “buying.”
Risk warning: Authorities are tightening supervision of tuition fee pricing; the number of students enrolled has fallen short of expectations; and the progress of for-profit registration has fallen short of expectations.