Revenue exceeded expectations in the first half of 2018, but earnings met expectations
Chengshi Foreign Education announced its results for the first half of 2018: revenue rose 23% year-on-year to 590 million yuan, 8.5% higher than consensus expectations. Homing net profit rose 20 per cent year-on-year to 213 million yuan, in line with expectations.
Trend of development
Growth is steady. The income of senior high school, junior high school and primary school grew strongly, up 29% and 28% respectively from the same period last year. Tuition fees rose slightly by 0-7% on average compared with the same period last year, but gross profit margin fell slightly by 4 percentage points to 48.5%, mainly due to dilution of the new campus with low profit margins. However, the company's cost structure remained basically unchanged, with the net interest rate rising 0.5 percentage points year-on-year to 37.2% in the first half of the year, mainly due to reductions in other operating costs and taxes. In addition, there is a surprise dividend. The company announced an interim dividend of HK $0.04 per share, corresponding to a dividend yield of about 50%.
The reserve campus is rich, and the volume of the new campus is expected to drive the performance in the second half of the year. In the 2018 college entrance examination, 37 Chengshi graduates have been admitted to Tsinghua University or Peking University, and 80 graduates have been sent to first-class universities without examination. Thanks to the status of the first-class K12 education brand in southwest China, there are 6 reserve campuses outside Chengshi, with a student capacity of about 27050. In the second half of 2017, six new campuses were opened outside Chengshi; we believe that the new school volume will help to improve the performance in the second half of the year.
Profit forecast
We keep our revenue and profit expectations unchanged.
Valuation and suggestion
The current share price corresponds to 23 times 2019 earnings. Taking into account the uncertainty related to the people's Promotion Act, we maintain a neutral rating and a target price of HK $4.7, which is based on 23 times 2019 price-to-earnings ratio, which is 2% lower than the current share price.
Risk.
Policy uncertainty; the number of students and tuition fees rose less than expected.