The company's 1H23 revenue growth exceeded expectations, achieving revenue/adjusted profit of 1,935/602 million yuan, +27%/+32.8% year on year. 1H23 continues to increase investment in teaching quality and content development, and the number of students continues to grow at a high rate. At the same time, new colleges and universities at home and abroad are expected to gradually provide additional volume to the company's performance, with sufficient momentum for long-term endogenous growth. Maintain an “increase in holdings” rating.

The increase in the number of students enrolled contributed to the company's 1H23 revenue and profit growth exceeding expectations. 1) Revenue and profit: 1H23 (FY, same below) company achieved revenue of 1,935 million yuan/ +27%. Looking at the split, tuition/accommodation fees/other (employment, training, etc.) income reached $16.72/143/115 million, +28.9%/+45.4%/-11.1% year on year. The company achieved adjusted net profit of 602 million yuan/+32.8%, and the adjusted net profit margin was 31.1% /+1.43pcts, mainly due to the increase in the number of students. 2) Gross profit and expenses: The company's gross margins and adjusted gross margin reached 50.3%/52.6%, -0.4pct/-0.2pct over the same period last year. The decline in gross margin is mainly due to the company's continuous improvement of the size of the teacher team to ensure the quality of teaching (teachers' remuneration expenses reached 514 million yuan/ +32%), expanded the training space and equipment, expanded the category expenses of 854 million yuan, and invested 132 new training centers and nearly 20,000 square meters of training rooms.

The company's sales/management expenses ratio was 7.9%/14.9%, compared to -0.7/+2.1pcts. The increase in management expenses was mainly due to the increase in depreciation and amortization due to the increase in mergers and acquisitions of institutions and the increase in share option expenses. 3) Asset situation: The company's 1H23 financing cost was 171 million yuan/ +30.6%, and the financial expense ratio reached 8.8% /+0.2pct, mainly due to the increase in loan size. As of February 28, 2023, the company has accumulated loans of 4,076 billion yuan/ +93.03%, mainly short-term loans of 2,464 million yuan/+86.65%, and long-term loans of 1,612 billion yuan/+103.66%. In addition, the company has convertible bonds of 1,979 billion yuan. The debt-to-equity ratio is 47.73% /+22.11pcts.

The number of undergraduate students continues to rise, and the capacity of the school building has exceeded 300,000. Looking at the breakdown, the company's domestic schools contributed 1,759 million yuan/+29.7% in the 1H23 fiscal year, while overseas institutions (mainly Indie schools) contributed 172 million yuan/+1.2% of revenue. As of February 28, 2023, the number of students enrolled (excluding Shinawatra University and Shaanxi colleges) was 280,453/+20.9%, and 95034 new students were enrolled in the 2022/23 academic year/+15.1%. According to academic qualifications, the number of undergraduate, college/technician students enrolled was 143402/124905/124905/12416 respectively, compared to +20.5%/+26.9% /- 16.5%. The total number of beds in the school building reached 30,7574 persons/ +15%, and the utilization rate reached 91% /+4.0pcts.

High-quality development lays the foundation, and the collaborative contribution of newly built colleges and universities at home and abroad continues to grow. 1) High-quality development enhances teaching standards and lays a solid foundation for development: the company's development momentum has shifted from epitaxial to endogenesis, invests heavily in teaching quality construction to raise the level of content development, and lays the foundation for long-term growth. FY1H23 has upgraded the basic networks of 16 colleges and universities, and co-ordinated 15 institutions. 1,674 teachers participated in textbook research and development, and published a total of 227 textbooks. 2) New institutions provide additional volume: 1H23 obtained approval from the provincial government for the establishment of the new Zhangshu Traditional Chinese Medicine Vocational College in Jiangxi Province. It is currently being reported to the Ministry of Education for the record, and the school has already met the conditions for enrolling students. Furthermore, the company established the Digital Industry Vocational College in Chongqing, which has now been reviewed by the Chongqing University Review Committee. At the same time, the company established the Jinzhong Higher Medical College on the basis of the former Jinci College, and undertook the land, buildings, facilities, equipment, and teachers of Jinci College, which is being reviewed. At present, the various schools are progressing steadily, and the company expects to start enrolling students in September. The steady progress of newly established institutions is expected to contribute to the increase in enrollment for the company. 3) Strengthen internal and external collaboration and raise the level of internationalization: The company's strong investment in the development of international education has shown results. The number of students enrolled in the latest round of international enrollment at its subsidiary Indie University in Malaysia increased 77% over the same period last year. In January 2023, Shinawatra University officially changed its name to the Thai University of Economics and Business, ranking among the top five private universities in Thailand. It is expected that in the future, the company will further promote the construction of overseas teaching systems and achieve collaborative development of domestic and foreign vocational education and training systems.

Risk factors: The progress of newly established institutions fell short of expectations; changes in industry policies exceeded expectations; the transfer progress of the company's independent colleges fell short of expectations; the company's enrollment situation fell short of expectations.

Investment advice: Considering that the company's 1H23 profit exceeded expectations, the core net profit forecast for 2023-25 was raised to 818/940/1094 million yuan (the original forecast was 792/900/1074 million yuan). Referring to comparable company valuations (China Education Holdings 7XPE in 2023, China Science and Technology Education Group 5xPE in 2023, Wind's consistent expectations), considering that the long-term development momentum provided by the company's high-quality development was sufficient, the company was given 7 times PE in 2022, corresponding to the target price of HK$0.8, maintaining the “increase” rating.