Company News The company released its 2018 annual report. It achieved annual revenue of 1,454 billion yuan, an increase of 48.25%, and net profit of 98.69 million yuan, a decrease of 38.41%. EPS was 0.29 yuan/share, and ROE = 4.56%. The company plans to distribute 0.15 yuan for every 10 shares. The matter commented on the high increase in revenue of Hengqi, IT losses and impairment of goodwill dragged down net profit. In 2018, the company's vocational education achieved revenue of 1,161 billion yuan, an increase of 89.44%, accounting for 79.83% of revenue (+17.36pct), contributing 140 million yuan, an increase of 11.34%. After deducting non-profits, net profit was 143 million yuan, an increase of 15.22%, after deducting non-profit accounting for 143.16% (+63.04pct). The profit growth rate was significantly lower than the revenue growth rate, mainly due to IT business losses and full impairment of goodwill. Specifically, Hengqi Education's annual revenue was 1,087 billion yuan, up 80.25%, enrolling 170,800 students, or 23.5%. Affected by the increase in the share of high-end courses, the customer unit price increased 11.86% to 7,394 yuan/person. Annual order sales repayments reached 1,263 billion yuan, an increase of 38.15%, and the revenue ratio (sales payback/revenue) was 1.16. Among them, sales repayments for the four major businesses of finance (excluding self-examination), self-examination, art design, and IT were 811 million yuan (64.25%, +18.91%), 225 million yuan (17.82%, +392.84%), 196 million yuan (15.53%, +67.95%), and 0.3 billion yuan (2.40% and -56.27%). Self-examination and art design developed rapidly, and IT declined sharply due to the closure of campuses. By the end of the period, Hengqi Education opened 397 campuses in 24 provinces, cities and more than 170 cities across the country, a net increase of 49 during the year, an increase of 14.08%, including 338 Hengqi, 51 Tianhu, and 8 traction companies (21 closed during the reporting period). On the online side, Hengqi's online education order repayments were approximately 0.05/138/289 million yuan in 16-18, respectively, achieving double growth. Supported by channel expansion, category expansion, and cross-track growth, Hengqi's revenue growth rate continued to increase, but due to significant losses (18-year revenue of 35.73 million yuan, same decrease of 47%, loss of 65.38 million yuan, same decrease of 420%, including full impairment of goodwill of 21.97 million yuan) and full impairment of goodwill, it achieved net profit attributable to annual net profit of 121 million yuan, an increase of only 10.35% over the previous year. The total three-year performance achieved cumulative deduction of non-net profit of 315 million yuan from gambling, with a performance commitment rate of 98.7%. CUHK's talent growth rate remained good. Revenue in 2018 was 94.11 million yuan, up 48.15%. Net profit was 27.48 million yuan, up 17.50%. There were 398,900 online transactions for the whole year, an increase of 25.83%, and the unit price of each customer was 249.7 yuan/person, an increase of 27.48%, and order sales repayments of 99.63 million yuan, an increase of 60.41%. The three-year performance achieved a total deduction of 66.16 million yuan in non-net profit for gambling, with a performance commitment completion rate of 101.79%. Comprehensive gross margin continued to rise. The 39% increase in advance payments at the end of the period was affected by the continued increase in the share of high-margin education businesses, reaching 70.13% (+5.15pct). Among them, gross margins for education, training and academic intermediaries, book products, instruments, accessories and others were 75.89% (-1.04pct), 29.41% (+13.29pct), 60.99% (+9.28pct), and 33.15% (+2.84pct), respectively. Sales/management/R&D/finance expense ratios were +8.87pct/-2.55pct/+0.73pct/+1.31pct to 26.18%/20.69%/5.95%/3.35%, respectively. The significant increase in sales expenses was mainly due to a sharp increase of 117%/175% in employee remuneration and business promotion expenses, respectively. At the end of the period, the company had a total of 2205 sales staff, an increase of 76%. The company invested 103 million yuan in R&D, accounting for 7.08% of revenue. Mainly, Hengqi invested 59.88 million yuan to develop Yunhu online management systems, Blue Whale systems, BI systems, etc., and the capitalization rate of R&D expenditure was reduced from 22.10% to 15.98%. The relatively rapid increase in financial expenses is mainly due to an increase in interest on bank loans and an increase in interest rate discount expenses on student loans. In addition, the company accrued asset impairment losses of 54.86 million yuan and non-operating expenses of 15.39 million yuan in the current period, which affected the level of profit to a certain extent. During the reporting period, the company's net interest rate decreased by 9.54 pct year on year to 6.78%. By the end of the period, the company's advance book payments were 290 million yuan, an increase of 39% over the beginning of the period, of which 263 million yuan was collected in advance for training fees. Divestment the manufacturing business to create a comprehensive vocational education group The manufacturing business will be divested and no longer merged in April 2019, and the company will become the target of pure vocational education. On the one hand, Hengqi is deeply involved in the four major businesses of finance, self-testing, design, and IT. The channel side is adding 10-20% new campuses every year, continuously improving the product matrix and continuing to expand to multiple categories, middle and high-end. On the other hand, it is actively expanding the racetrack. It has already explored new projects such as teacher qualification training, youth, and expert online schools. The future plans to explore and incubate no less than 2-3 new projects every year, and evolve into a multi-track and multi-brand comprehensive vocational education operation group. In 2019, Hengqi's target sales repayment was 1.5 billion yuan, an increase of about 19% over the same period. CUHK Talent will strengthen deep online and offline integration with Hengqi, including project pilots, personnel integration, etc., with a sales repayment target of 150 million yuan in 2019, an increase of about 51%. Investment proposal Due to the company's divestment of manufacturing operations and the closure of some IT campuses, we adjusted the original profit forecast and added the 2021 profit forecast. The net profit attributable to the company in 2019-2021 is 1.98/2.49/319 million yuan, respectively, the corresponding EPS is 0.57/0.72/0.92 yuan/share, respectively, and the corresponding PE is 20/16/12 times (calculated at the closing price of 2019/4/24). The company divested the manufacturing industry and became a pure vocational education company. Hengqi's sales repayment growth target is nearly 20%. It maintains a good momentum and shows confidence. At this stage, it is expected that the revenue side will maintain rapid growth under the repayment guidelines, and gradually transform into profits to usher in a steady release of performance. The company is gradually clarifying business lines and management mechanisms, and future operational efficiency is expected to improve to bring flexibility to performance. Currently, the valuation is at a low level, there is room for repair, and the “gain” rating is maintained. Risks indicate risk of impairment of goodwill, risk of changes in company control, risk of increased industry competition, risk of continued loss of IT business, risk of brain loss, etc.