Gross margin for the first half of the year was slightly lower than expected
China Education Holdings' revenue for the first half of fiscal year 2023 increased 18.1% year-on-year to 2.78 billion yuan (RMB, same below), mainly driven by the rapid increase in the number of students and income in higher vocational education and international education due to the lifting of all restrictions on overseas entry. Higher vocational education revenue was 2.35 billion, an increase of 20.6% over the previous year; revenue from international education was 110 million, an increase of 44.6%. The company expanded its teaching force during the period, so the half-year gross profit margin was 57.4%, down 1.9 percentage points from the previous year, lower than our full-year expectations. The reported net profit was 980 million, a year-on-year decrease of 16.4; adjusted net profit (adjustments include exchange losses, share-based payments, transfer fees for independent colleges, etc.) was 1.05 billion, up 15.0% from the previous year. The total number of students enrolled was about 340,000, with a net increase of 34,000, of which higher education (including adult education), secondary education, and international education each accounted for 84.2%/14.9%/0.9%.
The company paid a six-month dividend of RMB 16.38, with a dividend rate of 40%.
Accelerate campus expansion and focus on endogenous growth
The company spent 1.22 billion dollars in capital expenditure in the first half of the year, mainly for the construction project of the new campus and existing campus of Guangzhou University of Applied Science and Technology in Zhaoqing. The total capacity of the school will increase to 50,000 people in the 23/24 academic year. As management judges that demand for schools in the Greater Bay Area and Shandong is strong, schools in Guangdong and Shandong will be expanded in advance. By the end of February, the company had approximately $5.87 billion in cash on hand, and the company issued $500 million of offshore investment-grade secured bonds due in 2026 in April, mainly for campus expansion. Management believes that given the reversal of valuations in the primary and secondary markets, it is not yet the right time to carry out outbound mergers and acquisitions, which will focus on endogenous growth and improve the quality of running schools.
The target price was lowered to 9.20 yuan to maintain the buying rating
Since gross margin for the first half of the year was lower than expected, we lowered our gross profit margin for the full year by 2 percentage points to 57.7%; as Hainan schools returned to a 60% equity balance and increased minority shareholders' rights, FY23E's net profit forecast was lowered 5.3% to 1.95 billion yuan, an increase of 5.9% over the previous year. In the future, the company's endogenous growth will be the main driving force, maintaining the price-earnings ratio of 10 times the target valuation of FY23E, and lowering the target price to HK$9.20 accordingly. The potential increase is 31.1%, maintaining the buying rating.
Investment risk
1. After private schools choose to become “for-profit” schools, the effective tax rate will be raised to double digits, which will affect net profit growth; 2. Enrollment falls short of expectations.