Introduction to this report:
Endogenous growth is steady, and performance is in line with expectations; as a leader in private higher education, the company has plenty of cash on hand, and campus expansion drives endogenous growth.
Summary:
The performance was in line with expectations, and the “increase in holdings” rating was maintained. We forecast revenue for the 2024-2026 fiscal year to be $64.69/74.31/8519 million, respectively, and net profit of $21.05/23.17/$2,548 million respectively, giving a 10x PE valuation for fiscal year 2024, with a target price of HK$8.98, maintaining the “increased holdings” rating.
Performance summary: In fiscal year 22/23, the company achieved revenue of 5.616 billion yuan/yoy +18.1%, gross profit of 3.164 billion yuan/yoy +14.9%, and adjusted net profit of 1,908 million yuan/yoy +6.0%. Overall performance was in line with expectations. In fiscal year 22/23, the company's gross margin fell by 1.57pct to 56.34%, the sales expense ratio was 3.24% /-0.33pct, and the management expense ratio was 13.80% /-1.42pct, mainly due to the increase in the number of students and the commencement of use of new campuses and buildings and the commencement of depreciation. The financial expense ratio was 8.35% /+1.88pct, mainly due to rising interest rate on floating interest loans denominated in US dollars and the depreciation of the RMB.
Endogenous growth is steady, and higher education is driving income growth. Split business revenue: In fiscal year 22/23, the domestic market segment achieved revenue of 5.396 billion yuan/yoy +18.2%, mainly driven by an increase in the number of students enrolled in higher vocational education institutions and the average student income; the international market segment achieved revenue of 189 million yuan/yoy +16.4%, mainly driven by an increase in the number of new students enrolled. The private higher education sector gave full play to its role as an employment reservoir. In the 23/24 school year, the number of full-time enrolled students in the company's domestic schools was about 97,000/yoy +17%, and the number of new students enrolled in colleges and universities reached 840,000/yoy +18%; as of August 2023, there were about 248,000 full-time students/yoy +7%, and the number of full-time higher education students enrolled was 199,000/yoy +13%.
Maintain a high dividend ratio, and drive growth through endogenous expansion. The company continues to give back its shareholders a stable high percentage of dividends. In fiscal year 22/23, it announced a year-end cash dividend (corresponding to about 40% of adjusted net profit). By default, dividends are paid in 100% full cash. Looking at the medium to long term, China has established a two-track system of employment integration to promote the high-quality development of vocational education and clarify the direction of policy support for vocational education. As of August 31, 2023, the company had cash reserves of 5.802 billion yuan on hand. The cash in hand is abundant and can be used for the expansion and investment of the endogenous campus network. With the commissioning of two new campuses in the Guangdong-Hong Kong-Macao Greater Bay Area and the fourth campus in Australia, the school capacity has been further increased; at the same time, through the expansion of the Group's campuses, endogenous growth can be expected.
Risk warning: Campus expansion and student population growth falling short of expectations, risk of policy and regulatory fluctuations, etc.