Revenue was basically flat, and profit margins declined due to increased investment in running schools
Yuhua Education FY23 achieved revenue of 2.38 billion yuan, which was basically the same as the previous year; the adjusted gross margin/adjusted net profit margin fell by 11.5pct/11.5pct to 50.0%/40.7% year-on-year respectively, mainly because the company increased investment in teaching staff, campus renovation and expansion in the early stages of undergraduate teaching evaluation. According to the current for-profit registration progress, we assume that the company's schools complete the selection and begin applying the 25% income tax rate in FY26. The estimated net profit of FY24/FY25/FY26 is 9.21/9.45/762 million yuan. The target price based on DCF is HK$1.38 (previous value: HK$1.47), and the WACC was raised from 18.99% to 20.42%, with a sustainable growth rate of 1%. The Hong Kong dollar is 0.92 yuan against the RMB, maintaining a “buy” rating.
The number of undergraduate students enrolled has increased slightly, and the student source structure continues to be optimized; the FY23 company has adjusted its admissions strategy, drastically reduced and stopped self-examination and adult college entrance examination enrollment, and concentrated teaching resources at the undergraduate enrollment and teaching levels. At present, all three schools have been adjusted to a unified undergraduate and college promotion structure, with junior colleges as a supplement. The number of undergraduate students enrolled has increased slightly, and the registration rate has steadily increased. Considering the high undergraduate fees, we expect that as the share of undergraduate students increases, the company's overall average student income is expected to increase steadily in the future. Furthermore, the newly built Zhengzhou Institute of Software opened in September '23, and is expected to contribute to revenue growth starting in FY24. High school income declined slightly in FY23, mainly due to the company's strategic conversion of Xinzheng High School to a junior college, which led to a decline in enrollment. We expect that starting with FY24, as the last year students from Xinzheng High School graduate, the overall enrollment in high school will remain relatively stable.
Significantly increase investment in running schools to promote the growth of high-quality endogenous students
The adjusted gross margin and net profit margin of FY23 both fell 11.5pct to 50.0%/40.7% year on year, mainly because the company further expanded investment in teacher investment, campus renovation and expansion, curriculum development, and student activities to meet the requirements of undergraduate teaching evaluation and profit registration indicators, improve teaching quality, and enhance enrollment appeal. We expect that after this round of centralized investment, the scale of capital expenditure is expected to be drastically reduced in the next three years.
Target price HK$1.38, maintain “buying”
The net profit of FY24/FY25/FY26 is estimated to be $9.21/9.45/$762 million. Based on DCF, the target price is HK$1.38 (previous value: HK$1.47), WACC is raised from 18.99% to 20.42%, with a sustainable growth rate of 1%, and HKD/RMB 0.92, maintaining a “buy” rating.
Risk warning: Investment in high-quality schools has led to a decline in profit margins, slow progress in for-profit registration, and insufficient overseas funding.