Weak performance growth in 2022
The total revenue of Minsheng Education in 2022 was 2.35 billion yuan (RMB, same below), down 1.7% year on year. Among them, revenue from school education and online education increased 4.8% year-on-year and fell 8.8%, respectively. Management explained that the pandemic made it difficult to enroll and promote online education. The company's overall gross profit margin was 54.2%, lower than our original forecast of 55.1%. Affected by the construction of new campuses, equipment upgrades and increased teacher allocation, the gross margin of campus education fell 6 percentage points to 47%, and the gross margin of online education increased 1 percentage point to 62%. Marketing expenses and administrative expenses increased 12.5% and 6.3%, respectively, year over year. The company's net profit was 490 million, down 15.0% year on year. After deducting non-operating profit and loss, adjusted net profit was $600 million, a decrease of 22.4%. The company paid a year-end dividend of RMB 3.76 points, with a payout ratio of 30%. Furthermore, management stated that it will take the opportunity to appropriately acquire minority shareholders' rights in its schools to increase net profits.
Online HR business has a lot of potential
Online businesses, which account for 44.3% of total revenue, currently include distance education, education informatization, vocational ability improvement, international education, and exam assessment. A rich product matrix has been formed, such as human resources and employment, integrated services for digital intelligence, industry, and education, etc., to open up an integrated service platform for “enrollment - employment - vocational training”. Although enrolment in distance education has slowed in recent years, revenue from the human resources service business has increased rapidly. The human resources service business has created a service platform for “excellent students and work” skilled talents, and is committed to providing high-quality internship training, employment, career selection and vocational ability enhancement services for skilled talents in China.
The company's human resources platform connects schools, students, and enterprises through digital diversified employment SaaS for employment enterprises; provides HroSaaS to third party human resources service agencies, etc., to enable data exchange, display on the same platform, etc. Although the volume of human resources services is still small, management believes that the sector's revenue will increase by more than 50% in the post-pandemic era, and the growth rate will be higher than that of other business sectors.
Lower profit forecasts and target prices
As our 2022 results were lower than expected, we lowered our FY23 net profit by 28.3% to $5.2 billion, an increase of 5.8% over the previous year. The company's campus utilization rate is around 85%, and we believe that the number of students enrolled at its colleges will rise dramatically after they complete the option of being for-profit. The company's current corresponding valuation is 2.6 times the FY23E price-earnings ratio. Considering the company's dividend ratio of about 10.5% - 11.2%, we continue to value the price-earnings ratio of 6 times and lower the target price to HK$0.92.
Investment risk
1. Online/campus vocational education policy risks; 2. Online/on-campus education enrollment fell short of expectations.