Hope Education announced fiscal year 23 results, with annual revenue of $3.58 billion (up 17.7% year on year) and adjusted net profit of $875 million (up 15.3% year on year). Thanks to the increase in the number of students enrolled in the company, revenue and profit growth are in line with expectations.

The high increase in enrollment guarantees income growth. The number of students enrolled in Hope Education reached 280,000 in FY23, an increase of 20.9% over the previous year. Among them, the number of undergraduate and junior college students increased by 20% and 27%, respectively, over the same period last year. We believe that the rapid growth in enrollment has benefited from Hope Education's academic upgrading programs, namely undergraduate programs at home and abroad. The program allows junior college students enrolled at home to successfully obtain an undergraduate diploma through studying abroad, so it is very attractive to students. Due to the faster growth rate of junior college students, the average tuition fee decreased by 2.6% year on year, but due to the rapid increase in the number of students, the annual tuition revenue reached 3.35 billion yuan, an increase of 20.7% over the previous year.

The investment period for running schools has entered the closing stage, and profit margins can be expected to recover. We hope that education proposed the concept of high-quality development in '21. Since then, the school buildings of its institutions will continue to be updated to supplement the teaching team. As a result, personnel wage costs and fixed asset depreciation and amortization continue to grow rapidly, and the growth rate is higher than income growth. The Group's gross margin declined 3.68 percentage points from FY21. We believe that the Group's high investment will come to an end in FY23, and that future cost and expense increases will stabilize. The stabilization of the company's gross profit will return to expansion as tuition fees increase. We expect gross margins to reach 48.4%/49.2%/49.6% in the 24/25/26 fiscal year, respectively. In terms of expenses, the company's administrative expenses increased 24.3% year over year to 547 million yuan due to mergers and acquisitions of institutions. In the future, the company will strictly control expenses and optimize the operating efficiency of mergers and acquisitions, so we judge that the cost rate will remain stable.

Maintain the buy rating. Hope Education announced that the number of students enrolled in FY24 was 290,000, an increase of 3.7% over the previous year. We believe that the company has controlled the growth rate of current students while focusing on the quality of education. Due to a slowdown in student growth, we have lowered our revenue forecast for the next three years. We lowered the company's adjusted net profit for fiscal year 24,25 to RMB 965 million and RMB 1.04 billion. We added RMB1,267 million in adjusted net profit for FY26. We lowered our target price to HK$0.79 to maintain our buying rating.

Risk warning: Post-investment integration is unfavorable, and cost control is difficult to carry out; the epidemic has led to a decline in the demand for study abroad, affecting enrollment in domestic and overseas study programs.