Huali University Group announced that the annual income for the fiscal year 20 (up to the end of August) was 761.5 million yuan, an increase of 12.8% over the same period last year, and the adjusted net profit was 337.7 million yuan, an increase of 33.3% over the same period last year, of which the government subsidy was 11.8 million yuan, slightly higher than we expected.

Management expects enrollment at Huali College, Huali Vocational College, Huali technician College and continuing Education Program to increase by 3.4%, 19.5%, 27.2% and 5.4%, respectively, in the 2020Universe 21 academic year.

Huali University is expected to complete the conversion from an independent college to a private university by June 2021.

To reiterate the "increase", the new discounted cash flow is priced at HK $4.20.

The full-year performance was slightly higher than expected

Huali University Group reported an annual income of 761.5 million yuan in fiscal year 20 (as of the end of August), up 12.8 per cent from a year earlier, driven by a 1.2 per cent increase in enrollment and a 15 per cent increase in average tuition fees. Tuition income was 732.7 million yuan, up 16.4% from the same period last year; boarding fee income was 28.8 million yuan, down 36.2% from the same period last year, mainly due to the company's refund of 25.3 million yuan in accommodation fees during COVID-19 's epidemic. Due to the company's efforts to control costs during the epidemic, the gross profit margin was 59.4%, an increase of 4.9 percentage points. The ratio of sales expenses to revenue remained at 2%, while the ratio of administrative expenses to revenue decreased by 0.9 percentage points to 11.4% compared with the same period last year. During the COVID-19 epidemic, the company received a government subsidy of 11.8 million yuan, and its annual operating profit margin was 46.5%, an increase of 6.1% over the same period last year. The adjusted net profit was 337.7 million yuan, an increase of 33.3% over the same period last year, slightly higher than we expected. In fiscal year 20, Huali's student employment rate was also quite strong, with the rates of Huali College, Huali Vocational College and Huali technician College being 93%, 97.1% and 98% respectively.

Enrollment and tuition fees continue to increase

In fiscal year 20, enrollment at Huali College and Huali Vocational College increased by 17.4% and 9.8% respectively compared with the same period last year, while enrollment at Huali technician College and continuing education program decreased by 12.5% and 41.9% respectively due to student capacity constraints. The average tuition fees per student of Huali College, Huali Vocational College and Huali technician College increased by 9.6%, 17.4% and 0.8% respectively in fiscal year 20. Management plans to increase tuition fees at Huali College and Huali Vocational College by 10% and 5% every two years, respectively.

The expansion project and the conversion of private universities are going according to plan.

In the next 3 years, the company will build Jiangmen Campus of Huali College in three phases. The first phase will be divided into two sub-phases, the first sub-phase will be completed in August 2021, the completed student capacity will be increased by 4100 students, the second sub-phase will be completed in August 2022, and the completed student capacity will be increased by 6200. The dormitory expansion of Huali College's Zengcheng campus will be completed in August 2023 and can accommodate more than 3000 students. The expansion plan of Huali technician College will be completed in August 2022, after which the college will apply for a vocational college license. In 3-5 years, the total number of students that can be accommodated by Huali will increase by 169% compared with August 2020. The conversion of Huali College from an independent college to a private university is being carried out as planned and the management expects the process to be completed in June 2021.

To reiterate the target price of the new discounted cash flow is HK $4.20, we reiterate the "overweight" rating, and the target price of the discounted cash flow remains unchanged at HK $4.2, equivalent to 11.0 times the price-to-earnings ratio for fiscal year 21. Management plans to complete an acquisition each fiscal year, focusing on universities that are well-located and have great potential to increase enrollment. Key drivers include: 1) a substantial increase in the number of students; 2) better profit growth; and 3) termination of the partnership arrangement with Guangdong University of Technology, which will improve the company's profit margin and net profit in the future. The main risks include: 1) the more serious impact of the COVID-19 epidemic, and 2) delays in campus expansion plans.