Endogenous growth is steady; dividend rate 30%

Zhonghui Group's 1H23 achieved revenue of 970 million yuan (RMB, same below), an increase of 18.3% over the previous year. The gross profit margin is 50.6%, which is basically the same as the same period last year. The increase in revenue and net profit was mainly due to endogenous growth in the number of its students and average income per student, and the merger of Huashang Institute of Technology in January 2022. Results for the first half of the year continued to show the company's ability to strictly control costs, with sales and administrative expenses as a percentage of revenue falling from 20.9% in 1H22 to 19.5%. Net profit of 300 million was recorded during the period, an increase of 18.9% over the previous year, and a net profit margin of 30.7% (1H22:30.5%). The overall performance was in line with expectations. The company pays an interim dividend of HK9.0 cents, with a payout ratio of 30%.

The expansion of secondary and non-academic vocational education is accelerating

Tuition revenue in the first half of the year was 850 million, an increase of 16.9% over the previous year, accounting for 86.9% of revenue; income from accommodation fees and non-academic education services increased 31.0% and 23.0%, respectively. According to academic qualifications, income from higher vocational education/secondary vocational education/non-academic vocational education increased 14.8%/43.8%/26.2%, respectively. The growth of secondary vocational education and non-academic vocational education accelerated, and the combined share of income rose from 14.3% in 1H22 to 16.8%. The number of students enrolled was close to 86,000, a net increase of 8,000. To train highly skilled talents in line with market orientation and demand, the school opened majors in cross-border e-commerce, pharmacy, artificial intelligence, and smart network vehicle technology this year to help students acquire employment skills. The company slightly raised tuition fees for some courses this year. Management believes there is still room for tuition fees to increase. While increasing investment in teaching, gross margin will remain stable. The company's capital expenditure this year is about 600 million

Keep the profit forecast unchanged, with a target price of HK$4.73

We generally maintain the FY23E/FY24E revenue forecast of 1.88 billion/2.10 billion, net profit of 630 million/7.2 billion dollars; FY23E - FY25E revenue compound increase 12.2%; net profit compound increase 12.3%. As part of the company's FY22 dividend is distributed in the form of new shares, considering the impact of the dilution of the total share capital, our target price was slightly adjusted to HK$4.73, corresponding to 7 times the price-earnings ratio of FY23E. “Buy” rating.

Investment risk

1: Uncertainty about choosing to become a “for-profit” school; 2: Uncertainty about the number of places the government grants to private applied schools.