Campus expansion accelerated, and gross margin remained relatively stable. Continuing the high percentage of cash dividends, China Education Holdings' 1HFY23 achieved revenue/adjusted net profit of 27.75/1045 billion yuan (yoy +18%/+15%), which was about 51%/50% of our annual forecast, in line with expectations; gross margin was 57.4%, which remained relatively stable. The company declared an interim cash dividend, with a dividend rate of about 40%.
The 1HFY23 company's expansion and renovation expenses exceeded our previous full-year forecast, so we raised the FY23 capital expenditure forecast to 1.5 billion yuan, and adjusted the depreciation and amortization expenses of FY23-25 accordingly. The estimated net profit of FY23-F25 to the mother is 2.016/22.77/2,77/2,785 billion yuan. We raised WACC from 14.27% to 15.78% in line with market changes. The target price based on DCF valuation was HK$10.27 (sustainable growth rate of 1%, HKD/RMB 0.88). Keep “buying.”
Higher vocational education is growing steadily, and international education is rapidly rebounding
The overall endogenous growth of 1HFY23 continued its steady performance. The number of students increased by about 10% year over year, and the average student income increased by about 8% year over year. By business, the number of students in higher vocational education increased 14.6% year-on-year to 286,900, and revenue increased 20.6% to 2,348 billion yuan, accounting for 85% of the company's total revenue and 88% of the company's overall net profit; secondary vocational education enrollment fell 9.5% year-on-year to 50,600, and revenue fell 3.0% year-on-year to 320 million yuan; international education revenue also increased 44.6%, mainly due to the rapid increase in enrollment in the international education sector after the liberalization of the Australian border, and the number of students increased 14.3% year-on-year to 14.3% 3,200 people.
Accelerate campus expansion to drive endogenous growth, and have sufficient cash reserves
1HFY23's capital expenditure reached 1.22 billion yuan, mainly for the construction of new campuses and new buildings in existing campuses in Guangdong Province. Previously, we estimated the company's annual capital expenditure to be about 1 billion yuan. Combined with the capital expenditure of 1HFY23, we determined that due to the rapid increase in the number of students, FY23 will expand its campus in Guangdong, Shandong and other regions ahead of schedule, so the FY23 capital expenditure forecast was raised to 1.5 billion yuan. As of 1HFY23, the company's book cash reserves were approximately $5.874 billion; in April '23, the company issued 500 million yuan of investment-grade guaranteed bonds (expiring in '26), which were guaranteed by the Asian Development Bank. The funds raised will mainly be used to build and expand domestic institutions operated by the group. We expect the company to have sufficient funds to support subsequent campus expansion.
The target price is HK$10.27, maintaining the “buy”
We expect the company's FY23-FY25 net profit to be $2.016/22.77/2,77/2,785 billion. Taking into account market changes, the WACC was raised to 15.78% to obtain a target price of HK$10.27 based on DCF (previous value: HK$10.21), with a sustainable growth rate of 1%, and HK$0.88 against RMB. 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.