The company's 1H23 revenue is 1.95 billion yuan / + 4%. The expansion of teachers and the growth of enrollment fees affect the company's profitability. After adjustment, the net profit reaches 176 million yuan /-2.7%. From a professional point of view, 1H23 Wantong auto revenue continues to grow rapidly, driven by demand, with year-on-year revenue of + 25% and New Oriental Education & Technology Group / Xinhua computer revenue of-3% and 4.2% year-on-year. Enrollment resumed smoothly in the first half of the year, and overall new enrollment was + 20% year-on-year. Since the second half of the year, considering the low base effect, the trend of new enrollment is expected to continue, superimposed income is further released in the second half of the year, and profitability is expected to improve. In the medium and long term, the company is still increasing the construction of regional centers and further strengthening its brand, and we are optimistic that the company will achieve excellent growth in the pace of recovery.

Revenue end: affected by the decline in enrollment in the early long-term system, 1H23 income also increased by 4%. The company's 1H23 revenue rose 4 per cent year-on-year to 1.95 billion yuan, adjusted net profit fell 2.7 per cent to 176 million yuan, and adjusted EBITDA fell 6.1 per cent to 630 million yuan. Split up, the company's average tuition fees increased by 1.5% to 26200 yuan in the first half of the year, the average number of trainers increased by 2.6% to 147000, and the number of new trainers increased by 20% to 84552. The growth rate of new enrollment is much higher than that of income, which is mainly affected by the decline in enrollment in 2022. As of 1H23, the number of schools under the company is mainly 244, the same as at the end of 2022.

Profit side: the fluctuation of profit margin is mainly due to the increase in the number of teachers and the advance of sales expenses. The company's 1H23 gross profit margin fell 1.8pcts to 51.1% year-on-year, mainly due to increased teacher recruitment in the process of enrollment growth, and the number of 1H23 teachers increased to 5553 from 5075 at the end of 2022. The sales expenses increased by 16% to 513 million yuan compared with the same period last year, and the expense rate was + 2.7pcts compared with the same period last year. The main reason is that the enrollment expenses are recognized immediately after the enrollment is completed, while the income needs to be confirmed step by step according to the training time, which leads to the increase of the current expense rate. The average enrollment fee for students is 6067 yuan /-4%, which is optimized over the same period last year. The management / R & D / financial expense rate is 13.1%, 0.4%, 3.7%, respectively, which is the same as that of the same period last year /-0.1/-0.7pct. Taken together, the company's core net profit margin fell 0.6pct to 9.0% year-on-year.

The three core brands: the overall enrollment recovery is good, the indicators of Wantong continue to grow high, and New Oriental Education & Technology Group has been affected by the previous academic system to affect the current performance.

New Oriental Education & Technology Group: enrollment is + 26% compared with the same period last year, and the profit margin fluctuates due to the decline in enrollment in 2022. 1H23 realized revenue of 919 million yuan /-3%. In terms of weight price, the average number of trainees decreased by 4.4% to 59100 (of which the number of new trainees increased by 26.1% to 33500), while the number of new trainees decreased by 4.4% to 59100 (of which 21.7% and 36.0% respectively). The average tuition fee increased by 1.5% to 31100 yuan per person. Gross margin fell 5.0pcts to 52.7 per cent, segment performance fell 39 per cent year-on-year to 165 million yuan, and segment profit margin fell 10.5pcts to 17.95 per cent.

Xinhua computer: the increase of enrollment and tuition fees leads to the increase of gross profit margin, and the confirmation of expenses affects profits. 1H23 income is 380 million yuan / + 4.2%. The average number of trainees reached 41700 /-1% (of which the three-year system increased by 12%), the number of new trainees reached 13300 / + 8.5%, and the average tuition fee reached 1820 million yuan / + 5%. Gross margin rose 1.6pcts to 55.0 per cent, segment performance fell 8 per cent to 52 million yuan, and segment profit margin fell 1.8pcts to 13.6 per cent.

Wantong Automobile: the demand is exuberant and the high growth continues. 1H23 income is 404 million yuan / + 25%. The average number of trainees reached 38800 / + 20% (of which the three-year system increased by 27%), the number of new trainers reached 20500 / + 21.7%, and the average tuition fee reached 288,000 yuan / + 3.6%. Gross profit margin rose 4.6pct to 51.8%, segment performance turned into profit, reached 47 million yuan, segment profit margin reached 11.64%.

The enrollment growth of the beauty industry is strong, and the brand of short training is divided under the influence of terminal demand. Among the other brands of the company, except for the rapid growth of the beauty industry, the other brands are mainly short-term training, which is more significantly affected by macro employment and economic environment. Due to the differentiation of demand-side talent demand structure, different brands have different performance. In terms of income, the income of Omickey / delicious College / Hua Xin Zhiyuan is 1.61 million yuan respectively, which is 0.32 million yuan, which is 27% compared with the same period last year. From the point of view of enrollment, the average number of students trained by Omickey / delicious College / Aomandi / Huaxin Zhiyuan reached 4594Universe 1100Universe 1396Maple 529, compared with the same period last year. The number of new trainees reached 8666Universe 5605hand 1526Universe 518, compared with the same period last year + 23% "Universe 8% Universe" 77% Universe 12%. From the perspective of tuition fees, the average tuition fee of Omickey / delicious College / Huaxin Zhiyuan is RMB 5.9988 and 5.79 million yuan, which is 16% compared with the same period last year. From the point of view of gross profit margin, Omickey and delicious Institute gross profit margin + 4.7/+8.0pcts to 47.0% to 53.4%, Huaxin Zhiyuan gross profit margin-4.5pcts to 49.2% respectively.

Looking forward to 2H23: enrollment is expected to continue to grow, bringing profit release. Since the second half of the year, as the company's enrollment was greatly affected by the epidemic in the same period last year, enrollment in the second half of the year is expected to continue a good growth momentum. At the same time, due to the gradual release of income from the company's enrollment in the first half of the year, the company's profits are expected to be released gradually. In the medium and long term, with the company enrollment gradually on the right track and the scale effect of regional centralization strategy gradually emerging, the company is expected to usher in the improvement of profit margin and drive profit elasticity in the process of revenue growth.

Risk factors: the company enrollment is not as expected; the industry policy changes; the company enrollment cost control is not as expected; the deterioration of the employment environment leads to a decline in demand and other risks.

Profit forecast, valuation and rating: taking into account the increase in sales expenses brought about by the company's short-term enrollment expense growth, and the impact of enrollment restrictions during the epidemic still need time to eliminate, we downgrade the company's core EPS forecast for 2023-2025 to 0.22 EPS 0.32 shock 0.42 yuan (the original forecast 0.27 shock 0.36 shock 0.47 yuan), reference to comparable vocational education company 2023 valuation level (Wind consensus expectations Action Education 22x PE, Chalk 21xPE, Chinese Education Holdings 7xPE), and considering that the company's business model includes not only asset-light training such as chalk, but also asset-heavy academic education such as secondary education, the company is given a comprehensive 15xPE in 2023, corresponding to a target price of HK $3.70, maintaining a "buy" rating.