China Eastern Education released the 2023 Interim Report. 1H23 revenue was $1.95 billion, up 4.0% year on year, mainly due to a 20% increase in the number of new recruits and new customer registrations; gross profit of $1.0 billion, up 0.4% year on year; net profit of $200 million, a year-on-year decrease of 15.9%; adjusted net profit of $180 million, a year-on-year decrease of 2.7%, and an adjusted net profit margin of 9.0%, down 0.6 pct from 1H22. Net profit adjustments included equity incentives of $0.2 billion and net exchange loss of $0.4 billion.
1. Overall revenue growth of the division. Revenue from the three major divisions: ① Cooking Technology: 1H23 New Oriental Cooking revenue was 920 million yuan, down 3.0% year on year, accounting for 3.4 pct year on year; Omic revenue was 160 million yuan, up 2.7% year on year, accounting for 8.2% year over year, down 0.1 pct year on year; Taste Academy was 0.3 billion yuan, up 9.4% year on year, accounting for 1.7%, up 0.1 pct year on year; ② Information Technology and Internet Technology: Xinhua Computer 380 million yuan, up 4.2% year on year, accounting for 19.4%, same as 1H22; Huaxin Zhiyuan 0.2 billion yuan, a year-on-year decrease of 26.7%, accounting for 0.8%, a year-on-year decrease of 0.3 pct; ③ Auto service: Wantong Auto was 400 million yuan, an increase of 24.5% over the previous year, accounting for 20.7%, an increase of 3.4 pct over the previous year.
The number of people trained in the automotive service business increased by 20.2%, and the number of trainers in the fashion and beauty industry increased by 85.6%. At 1H23, the number of new trainers/new customer registrations was 85,000, an increase of 20.0% over the previous year. The average number of trainers per month in 1H23 was 147,000, an increase of 2.6% over the previous year; among them, the average number of trainers for New Oriental, Xinhua Computer, Omic, and Huaxinzhi in the previous month was 59,000, 42,000, 50,000, and 529, respectively, a year-on-year decrease of 4.4%, 0.8%, 3.2%, and 36.6%; the average number of trainers per month for Wantong Auto and Delicious Academy was 39,000/1100, up 20.2% and 8.2%; the average number of trainers per month in the Aumantis Fashion and Beauty Industry was 1,396, up 85.6% year on year.
Long-term courses account for an average of -1.8 pct of training sessions per month. The average number of trainers in 1H23's long-term courses per month was 131,000, an increase of 0.5% over the previous year. The average number of trainers for long-term courses accounted for about 88.9% of all courses; among them, the average number of trainers for 1-2 years/2-3 years/3 years changed -1.6%/-37.8%/+20.8%, respectively. The average number of short-term courses trained per month was 16,000, an increase of 22.7% over the previous year.
2. Seven major brands, 244 schools and centers cover most provinces. As of June 30, 2023, the company has operated 244 schools and centres in most provinces of mainland China and Hong Kong. Among them, there are 76, 46, 20, 38, 20, 40, and 4 schools for New Oriental Culinary Education, Omichi Pastry Western Food Education, Food Academy, Xinhua Computer Education, Huaxin Zhiyuan DT Talent Training Center, Wantong Auto Education, and Omandi Fashion and Beauty Education, respectively, an increase of -1, 0, -1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, and 1.
The rate of employment referrals has stabilized at over 90%. The company is committed to helping students develop their careers. In terms of the average referral employment and entrepreneurship rates of long-term course graduates, New Oriental, Xinhua Computer, Wantong, Omic, and Amandi reached 93.8%, 92.6%, 92.7%, 93.1%, and 95.6% respectively, compared to -1.0/-1.3/-3.4/+0.2pct.
3. Investment in salary and teaching consumables increased, and gross margin decreased by 1.8 pct over the same period last year. 1H23's faculty and staff salaries and benefits increased 14.9% to $360 million, accounting for 18.5% of revenue, up 1.8 pct year on year; teaching-related consumables and other costs increased 16.2% to 190 million yuan, accounting for 9.8% of revenue, up 1.0 pct year on year; depreciation of leasing expenses/usage rights assets decreased 4.6% to 160 million yuan, accounting for 8.0% of revenue, down 0.7 pct year on year; campus maintenance and depreciation decreased by 3.4% to 170 million yuan, accounting for 8.6% of revenue, up 0.1 pct year on year. The gross profit margin was 51.1%, down 1.8 pct from the previous year, mainly due to rising costs such as salaries and benefits for faculty and staff, and teaching-related consumables.
The fee rate increased by 1.9 pct during the period. ① Sales expenses ratio: Increased by 2.7 pct to 26.3% year on year, and sales expenses increased 15.8% year on year to 5.1 billion yuan, mainly due to investing more advertising resources and hiring professional consultants to design a new image for New Oriental. Customer acquisition costs fell 3.7% year on year, from 6287.4 yuan/person in 1H22 to 6057.5 yuan/person; the teacher-student ratio rose from 1:31 of 1H22 to 1:27, an increase of 14.8% over the previous year. We determined that the main reason was that as teaching returned to normal, the company's enrollment and number of teachers recovered. ② Management expenses rate: The same as the previous year was 13.1%, and the management expenses increased by 4.1% year on year to 260 million yuan. ③ R&D expenses ratio: Decreased 0.1 pct to 0.4% year on year, R&D expenses decreased by 21.6% year on year to 0.1 billion yuan. ④ Financial expenses ratio: Financial expenses decreased by 0.7 pct to 3.7% year on year, and financial expenses decreased 13.1% year on year to 70 million yuan.
Affected by a slight increase in cost and expense ratios, 1H23's net profit was 200 million yuan, a year-on-year decrease of 15.9%; adjusted net profit was 180 million yuan, a year-on-year decrease of 2.7%.
4. Company business plan. Establish regional centers and provincial education bases to strengthen market position: The company plans to establish its own regional center in China to provide complete teaching and training practice facilities for seven central brands (namely New Oriental, Omich, Delicious Academy, Xinhua Computer, Huaxin Zhiyuan, Wantong and Aumandi). Currently, the company's first phase district centers in Chengdu, Sichuan and Jinan, Shandong have been put into use, while the first phase regional centers in Guiyang, Guizhou, and Zhengzhou, Henan are under construction and are expected to be completed in 2024.
Diversify the curriculum structure: For the four industries currently covered, including cooking technology, information technology and internet technology, automotive service, and fashion and beauty, the company plans to expand its business to make future courses more diverse. The company studies potential new industries involved in possible new schools in light of market demand trends and anticipated future trends. The company will continue to develop other markets for services such as artificial intelligence and healthcare and vocational skills education in the new economy.
5. Update profit forecasts. Considering the impact of the epidemic, we expect the company's net profit to be 455 million yuan, 646 million yuan, and 890 million yuan, respectively, with year-on-year increases of 24.24%, 41.79% and 37.82%, respectively, and EPS of 0.21 yuan, 0.30 yuan and 0.41 yuan, respectively.
6. Maintain judgment on the company. The company is in a leading position in the three skills education fields of cooking technology, automobile maintenance, and information technology, and has built seven major vocational education brands: New Oriental Cooking, Omitage Pastry, Delicious Pastry, Xinhua Computer, Huaxin Zhiyuan DT Talent Training, Wantong Auto, and Omandi Fashion and Beauty. The company is actively expanding its business content, and its ability to expand across tracks is gradually being verified, and the ceiling for growth is expected to open up. ① Brand power: Compared with FMCG products, education brands require time accumulation and quality assurance; ② Channel: The target customer groups faced by the company have certain commonalities, and the huge campus network lays the foundation for the company's multi-brand strategy; ③ Management: Due to the special properties of education products, it is difficult for new categories to use the cognitive advantages of existing successful categories to enter the consumer mentality. In the early stages of promoting new brands such as Omitch and Huaxin Zhiyuan, the company had many years of teaching and control experience, and channel management experience still had a great advantage. Furthermore, the company currently has $2.9 billion in cash and deposits, no bank loans, sufficient capital and high-quality assets.
Furthermore, in October 2021, “Opinions on Promoting the High-Quality Development of Modern Vocational Education” was issued, indicating that by 2025, the enrollment scale for undergraduate vocational education will not be less than 10% of the enrollment scale for higher vocational education; in June 2023, the “Vocational Education, Industry-Education Integration, Empowerment and Enhancement Action Plan (2023-2025)” was introduced to encourage the development of vocational education.
Among them, it is estimated that by 2025, the number of pilot cities for the integration of maternity and education in the country will reach about 50, and that more than 10,000 integrated maternity and education enterprises will be built and cultivated throughout the country. We judge that year 25 is the year of acceptance of vocational education development results, and vocational education in 23 and 24 is expected to achieve great development under policy guidance. With its competitiveness, the company is expected to usher in rapid new growth.
Based on 17-20 times PE and 9-10 times EV/EBITDA in 2023, calculate the reasonable value range of HK$3.88-4.74 per share (corresponding to $3.55-4.34 per share, calculated based on HK$1 = RMB 0.9165); maintain the “superior to market” rating.
Risk warning: Enrollment falls short of expectations, market competition risk, industry policy risk, foreign exchange risk.