Growth on the revenue side is stable, in line with expectations
China Education Holdings FY23 achieved revenue of 5.62 billion yuan (RMB, same below), an increase of 18.1% over the previous year; the increase in the number of students and the increase in per capita income each accounted for half, in line with expectations. This year, the company adjusted its revenue announcement structure and divided it into domestic and international markets by region. FY23 domestic and international market revenue accounted for 96.1% and 3.9%. There were 97,000 full-time enrollment students in the 2023/24 academic year, an increase of 17% over the previous year, and the utilization rate of the quota index was 91.6%. Above the average in 2023/24, the total number of full-time students enrolled increased to 248,000, an increase of 7% over the previous year. Affected by higher depreciation and amortization expenses, FY23's gross margin fell slightly by 1.6 percentage points to 56.3%, slightly below expectations.
Report net profit due to a sharp drop in one-time expenses
Affected by the decline in enrollment numbers and natural disasters, the company estimated intangible asset impairment of 490 million yuan for the Zhengzhou Urban Rail Transit Secondary Vocational School during this year. The number of students enrolled did not return to before the pandemic, mainly because parents and students preferred schools with longer study paths. Furthermore, although the company made every effort to reduce the average interest rate on RMB loans, it was unable to offset the increase in the burden of financial expenses due to the rise in US dollar interest rates. Financial expenses during the period increased by 52.3% year-on-year to 4.7 billion yuan. As of August 2023, the company still had outstanding loans worth about 1.5 billion yuan in US dollars, accounting for about 17% of the total loan amount. Based on these factors, FY23's net profit fell 25.2% year on year to 1.38 billion yuan. Excluding a series of non-cash flow projects, the company's FY23 core net profit was 1.91 billion yuan, up 6.0% year on year, slightly lower than expected. The FY23 company's dividend rate is 40%, and the corresponding dividend rate is about 7% - 8%.
Lower net profit forecast and target price
Due to the expansion of the company's campus capacity and steady growth in the number of new students, we raised our FY24E/FY25E revenue forecast by 5.2%/7.1%. The company guidelines FY24E/25E have an annual capital expenditure of 2.6 billion yuan. Considering that capital expenditure is still high in recent years, we have lowered our gross margin forecast to 56.0%/55.2%. After raising the company's operating expenses, we lowered the FY24E/FY25E net profit forecast by 7.2%/6.8% to 2.06 billion/2.33 billion yuan. The target price valuation rolled over to FY24E and lowered to a price-earnings ratio of 6 times, with a new target price of HK$5.70. The company's stock price plummeted 18% after the results were announced. We believe that the market reaction was too intense in the short term. As an industry leader, the company's business will maintain steady growth in the long run.
Investment risk
1. After private schools choose to become “for-profit” schools, the effective tax rate will be raised to double digits, which will affect net profit growth; 2. Enrollment falls short of expectations; 3. The impairment of the remaining secondary vocational schools assumes risk.