Revenue and profit grew steadily, with a payout ratio of 33%: the company's operating income in 2019 was 440 million yuan, up 13.4% year on year, with a compound growth rate of 11.8% over the past 6 years; adjusted net profit of 296 million yuan, up 14.4% year on year, and a compound growth rate of 17.3% over the past 6 years. While Haiyuan University delayed the acquisition, the company maintained a steady increase in revenue and profit in 2019. The relocation of Hongshan College and the School of Clinical Medicine has not yet been completed, and they have not yet been consolidated. In 2019, the company announced a final dividend of 5.53 HK cents per share, with a payout ratio of 33% of net profit.
Profit margins remained stable, with new mergers and acquisitions of Hongshan University added during the year: the company's gross margin and adjusted net interest rate in 2019 were 67.6% and 59.7% respectively, maintaining stable levels over the previous year. In March 2019, the company's acquisition project at Hongshan University brought in more than 9,000 students. As of the end of 2019, there were 45,000 students in the company's merged+unmerged projects, an increase of 30% over the previous year. The compound growth rate for the past 6 years was 7%.
Cash and equivalents were sufficient, and deferred revenue grew steadily: in 2019, the company's accounts reached 1.38 billion yuan, net cash reached more than 1 billion yuan, and the cash on account was sufficient. The company will continue to invest in the construction of Hongshan University and the School of Clinical Medicine. The total capital expenditure for the construction of the two schools is 7-9 billion yuan. At the end of 2019, the company's contract debt increased 12.5% year-on-year. It is expected that the company's revenue from Xinhua University and Xinhua School will remain stable in the past in the future.
Steady growth has been maintained, and valuations are low in the industry. Maintain “buying”, target price of HK$3.2: Currently, the company's market value is HK$3.4 billion. Its assets include net cash of 1 billion yuan, 3 undergraduate schools and 1 secondary school, 45,000 students and all land sold. The current price of PE is at a low level in the industry corresponding to 10 times that of 2020. We adjusted our profit forecast to maintain the current consolidated profit situation of Hongshan College and the School of Clinical Medicine. We expect the company's revenue in 2020-2022 to be 496, 546, and 642 million yuan respectively, up 13.3%, 10.0% and 17.7% year-on-year. Net profit was 304, 351, and 408 million yuan respectively, up 12.5, 15.4% and 16.3%, respectively. We maintained the company's “buy” rating and adjusted the target price to HK$3.2 when the acquisition was delayed. The target price corresponds to 15/13 times PE in 2020/21, with room for a 50% increase from the closing price on March 27, 2020. The growth rate of the company's performance is steady, valuations are already low in the industry, and the corresponding market value of asset value has been undervalued.
Risk warning: 1) acquisition integration falls short of expectations; 2) changes in China's education policy; 3) enrollment numbers fall short of expectations; 4) company revenue comes from a few cities in China; 5) VIE structure policy risks.