Performance review
Revenue and adjusted net profit in the first half of 2023 are basically in line with our expectations
China Oriental Education announced its results for the first half of 2023: revenue of 1.95 billion yuan, an increase of 4.0% over the same period last year; adjusted net profit of 176 million yuan, down 2.7% from the same period last year, which is basically in line with our expectations. The slight decline in net profit from the same period last year was mainly due to a year-on-year increase in teachers' salaries, teaching supplies and marketing expenses.
Trend of development
The number of enrollment ushered in the same period of repair. In the first half of 2023, the number of new students increased by 20 per cent year-on-year to 85000 (the average training attendance increased by 3 per cent year on year). From a professional point of view: in the first half of 2023, 1) Auto repair (Wantong) income / new enrollment year-on-year + 25% Universe 22%, mainly due to the strong employment demand of new energy factories and new professional contributions of new schools began to appear; 2) Cooking (New Oriental Education & Technology Group, Omichi, delicious College) income / new enrollment year-on-year-2% Universe 23% 3) Information technology (Xinhua computer, Huaxin Zhiyuan) income / new enrollment year-on-year + 3% Universe 22% Box4) Fashion Beauty (Aumanti) income / new enrollment year-on-year + 19% Universe 77%; among them, the growth difference between income and new enrollment is mainly due to the decline in the income contribution of 2-3-year seniors during the reporting period due to enrollment restrictions during the previous two years, which we expect to be digested in 2025. According to the sub-academic system, in the first half of the year: 1) the brands of New Oriental Education & Technology Group, Xinhua, Wantong and Meiye, which offer long and short academic systems, almost all achieved double-digit year-on-year growth in the number of new students in 3-year courses and short-term training for less than one year, while the number of new students in 2-3-year courses generally declined compared with the same period last year. We believe that the main departments of low / high-age students respectively postpone employment time / develop core skills to alleviate short-term employment pressure. 2) Omickey and Huaxin Zhiyuan, which provide mainly short training courses, were divided in the number of new students in the first half of the year, of which the number of new students enrolled by Omickey was + 23% compared with the same period last year, while Huaxin Zhiyuan was-12%. According to the management performance sharing, the growth of the three traditional sectors of recruitment in the autumn of 2023 is relatively bright; we expect the company's advantageous specialties such as cooking and auto repair to achieve double-digit year-on-year growth in new enrollment from July to August.
Profit margin in the first half of the year is under pressure temporarily, pay attention to the second half of the fee control optimization rhythm and profit elasticity. The gross profit margin of the first half of 2023 recorded 51.1%, a year-on-year decline of 1.8pct, of which: cooking brand gross profit margin fell more than 3pct year-on-year, mainly due to the high cost of teachers and teaching consumables; Wantong and Xinhua brand gross profit margin improved year-on-year under the climbing contribution of new school profits. In the first half of 2023, the adjusted net interest rate was 9%, a year-on-year decline in 0.6ppt, mainly due to cost rigidity and an increase in sales expenses related to online delivery and offline enrollment. Management said that the average income per student in the second half of the year may increase under the rapid repair of short-term training enrollment, and will continue to strengthen sales-related fee control, and the group's overall adjusted profit margin is expected to continue to repair in 2024-2025.
Profit forecast and valuation
Taking into account the uncertainty of enrollment and fee control, we respectively lowered the 24-year income forecast for 2023 Universe by 4% to 4.26 billion, and the adjusted net profit forecast for home ownership by 15%, 12% to 427, 700 million.
Maintain an outperform industry rating; lower the target price by 33 to HK $4, taking into account the downside of the market valuation hub (based on 3.4 times the 2024 adjusted EV/EBITDA, the current share price is trading at 2.3 times, based on the real exchange rate), corresponding to 49 per cent upside.
Risk
The competition intensified; the impact of the epidemic persisted; the number of enrollment was less than expected.