FY23 revenue increased 17.0% year over year
Zhonghui Group announced FY22/23 results, with annual revenue of 1.97 billion yuan (RMB, same below), up 17.0% year on year. There were 86,000 students enrolled during the period, a net increase of 8,500 over the previous academic year. Higher vocational education/secondary vocational education/non-academic education accounted for 83.9%/12.8%/3.3% of income, respectively. Among them, income from secondary vocational education increased sharply by 34.7% year on year, but income from non-academic education fell slightly by 5.5% year on year. Zhonghui's gross margin for the second half of the year was 52.6% month-on-month, and the gross profit margin for the whole year was 51.6%, slightly higher than our expectations.
Non-cash projects cause net profit to fall short of expectations
Annual sales expenses of 56 million yuan, accounting for 2.8% of revenue, are in line with expectations; however, administrative expenses of 290 million dollars, accounting for 14.9% of revenue, higher than 14.0% last year, and higher than our expectations. At the same time, during the period, the company recorded unanticipated fair value losses of investment properties and anticipated credit losses totaling 38 million yuan. This was a non-cash project and did not affect core business operations; as well as higher than expected financial expenses of 26 million yuan, resulting in annual net profit of 620 million yuan, an increase of 9.0% over the previous year, slightly lower than our expectations. After excluding all non-cash items, adjusted net profit was 670 million yuan, up 15.3% year over year. The company announced that the dividend rate would remain at 30%.
Investment in high-quality schools has increased, with a new target price of HK$5.17, maintaining a steady increase in the number of students enrolled by “buy” rating companies every year. The number of new applicants for the 2023/24 new school year was 38,000, an increase of 7,000 over the previous school year; the total number of enrolled students increased to 95,000, an increase of 15.9% over the previous year; the number of students enrolled in schools in Guangdong and Sichuan was 62,000 and 33,000, respectively. The number of endogenous growth remains at a reasonable and healthy level. The company expects an average annual growth of about 9% over the next two years. FY22/23 has a capital expenditure of 650 million yuan. Considering that the company will continue to invest in high-quality schools, expand the Jiangmen and Meishan campuses, deepen the integration of industry and education, and maintain high-quality exports of graduates, future capital expenditure is expected to remain 600 million yuan per year. We raised FY23/24E and FY24/25E operating expenses by 5.7% and 5.6%; and lowered net profit by 2.9% or 3.4% to 790 million yuan or 790 million yuan. The new target price is HK$5.17, corresponding to 7 times the FY23/24E price-earnings ratio, maintaining the “buy” rating.
Investment risk
1: Uncertainty about choosing to become a “for-profit” school; 2: uncertainty about the number of places granted by the government to private vocational colleges of higher learning.