East Education reported interim results with sales and adjusted net profit up by 4% and 0.8% YoY in 1H23 respectively, slightly below market expectation. Average tuitions increased, but gross margin slightly declined and SG&A cost growth outpaced the sales growth. We reckon the margins and net profit performances would improve.Education companies still have good growth outlook and cash collection ability, as well as decent cash dividend payout. We retain sales and earnings estimate unchanged, as well as the target price.With 80% upside, retain BUY rating.
Key Factors for Rating
Revenue increased by 4% YoY in 1H23, in line with expectation. Sales breakdown, the 20% YoY of auto service, and new segment of fashion contributed the major growth. The culinary arts and the IT service segment actually declined slight, respectively at -4.2% ad -3.-1.5% YoY. The three major segments contributed 99.1% of sales, 44% for the culinary arts, 28.7% of IT service, 26.4% for auto service. ASP rose 2.4% YoY for the culinary arts, 4.1% YoY for the IT segment, and 3.6% YoY for the auto service segment. East Education still aims to grow sales by 15% YoY in 23E and 24E.
Gross margin and SG&A cost actually delivered the major miss in earnings. Gross margin was 51.1% in 1H23, slightly lower than 52.9% in 1H22. Selling and marketing cost rose by 15.8% YoY, higher than top-line growth. Administrative cost 4.1%, in line with sales growth. It indicates East Education spends more on admitting students.
The catering industry increased by 21.4% YoY in 1H23, according to the Bureau of Statistics, one of the few still fast-growing sectors in China. The demand for the culinary service remains strong, the major support of East Education sales growth. The employment pressure pushes students to go for vocational education.
Key Risks for Rating
East Education has multiple history of earnings miss since IPO listing. Whether they will deliver earnings in line with expectation in 2H23 would be critical.
Valuation
Our sales and net profit estimate are below consensus estimate, indicating our conservative estimate. There is no need to adjust our estimate. We retain sales, earnings and TP unchanged. With 80% upside, retain BUY rating.