Performance review

FY2023 semi-annual revenue and profit are in line with expectations

The company announced results for the first half of fiscal year 2023: revenue of 1.93 billion yuan, up 27% year on year; adjusted net profit of 551 million yuan, up 21% year on year, basically in line with our previous expectations. According to the performance announcement, in December 2022, the company's Guilin Shanshui Vocational College (Guangxi Colleges and Universities) was approved for the classification registration procedure for for-profit private schools, and the company's two undergraduate colleges in Guizhou are applying for camp selection licenses.

Development trends

Endogenous growth is impressive, and continuous integration and optimization is ongoing. The company's revenue for the first half of fiscal year 2023 increased 26.7% year-on-year to 1.93 billion yuan. Among them, endogenous growth contributed greatly; exogenous revenue came from the Wickler School of Business and Guangxi University in Hungary that the company acquired during the reporting period. We expect the revenue contribution of the two merged institutions to be at the level of 10 million yuan. Looking at the number of institutions, as of the end of February 2023, the company had 25 schools, including 7 self-built and 18 acquired; management said that its two new colleges are expected to be completed and used in September this year. Looking at the number of students enrolled in the company during the reporting period, the number of students enrolled in the company reached 280,000, an increase of 21% over the previous year; the number of new students enrolled reached 95,000, an increase of 14% over the previous year. At the same time, the Group's overseas school business is developing efficiently: the company's new international enrollment at Indie University Malaysia increased 77% year-on-year; up to now, the company has more than 15,000 overseas students, and overseas revenue has exceeded 300 million yuan, accounting for more than 10% of its annualized revenue. The company expects that, driven by focusing on high-quality endogenous growth and pioneering international vocational education standards, the average number of students in schools is expected to rise from the current 12,000 to 20,000 in the next five years, and the average student fee is expected to rise from the current 12,000 yuan to 20,000 yuan.

The decline in net interest rates has slowed, and financial pressure has improved. The company's adjusted gross profit margin for the first half of fiscal year 2023 was 52.6%, which was basically the same as the previous year; the adjusted net profit was 551 million yuan, corresponding to the adjusted net interest rate of 28.5%, down 1.2 percentage points from the previous year, mainly due to the upgrading of the school environment (132 new training centers were built during the period), the introduction of teachers (more than 1,000 new teachers were introduced during the period, teacher remuneration expenses increased 32% year-on-year to 514 million yuan), and administrative expenses increased due to mergers and acquisitions of new institutions. Despite this, management said that during the period, the company's capital expenditure fell by nearly half to 8.3 billion yuan year on year, and operating cash flow increased 30% year on year; by the end of the reporting period, the company's cash and cash equivalents were 2.75 billion yuan, and future capital pressure is expected to improve. We anticipate that as the scale of the company's capital expenditure falls and land and campuses are put into use one after another, the adjusted net profit of the parent in FY2023 may increase 10% year-on-year to $829 million.

Profit forecasting and valuation

Considering the pace of post-pandemic enrollment recovery and the uncertainty of the operation of new institutions, we lowered our revenue forecast for the 23/24 fiscal year by 5%/5% to $3,56/440 million; considering the construction and management expenses of new institutions, we lowered our revenue forecast for FY23/24 by 6%/6% to $83/940 million. Maintaining a neutral rating and target price of HK$0.62, corresponding to 4.9/4.1 times the adjusted EV/EBITDA for fiscal year 23/24, there is 7% room for an increase from the current stock price. The current stock price corresponds to 4.8/4 times the 23/24 adjusted EV/EBITDA.

risks

Applications for the for-profit classification of schools were uncertain; enrollment and tuition fee growth fell short of expectations.