Capacity expansion and quality improvement are progressing steadily, and the debt structure is gradually improving
We hope that Education FY23 will achieve revenue of 3,582 billion yuan (yoy +17.7%), net profit of 211 million yuan, and adjusted net profit of 875 million yuan (yoy +15.3%). The adjustments are mainly non-cash impairment losses for financial assets and losses from changes in the fair value of convertible bonds; adjusted gross margin/adjusted net interest rate +0.2/-0.5pct year-on-year. The number of new students enrolled and enrolled in FY23 continues to grow steadily, and the debt structure is gradually being optimized. We expect the adjusted net profit of FY24-26 to be 938 million /1,079 million /1,235 million yuan, adjusted WACC from 14.14% to 14.19% in line with market changes. The target price for DCF is HK$0.83 (previous value: HK$0.80), a sustainable growth rate of 1%, and HK$0.92 against RMB. Maintain “buying.”
Continue to increase investment in running schools and consolidate the foundation for high-quality endogenous growth
FY23's expansion capital expenditure reached 1,498 billion yuan (yoy -36%), focusing on college renovation and expansion, incremental renewal of teaching and training equipment, campus environment renovation and upgrading, etc., and built 172 new training centers and more than 20,000 square meters of internship training rooms; the company continued to increase the number of highly qualified teachers, introduced more than 3,000 new teachers, and teachers' remuneration expenses increased by 21.1% year-on-year. As of FY23, the overall utilization rate of the company's school buildings has reached 95.2%, and about 57% of the land is still undeveloped, so there is plenty of room for potential expansion. We expect that in the next two years, the company will maintain large-scale expansion capital expenses for mergers and acquisitions, and meet the requirements of indicators such as college conversion, classification registration, and teaching review and evaluation to lay a foundation for long-term high-quality development. However, with the gradual completion of initial investment in land, school buildings, etc., the scale of future capital expenditure is expected to decline year by year.
The number of students enrolled is growing steadily, and there is still room for improvement in average student fees
FY23's 24 institutions enrolled 100,016 new students, up 5.24% year on year. The number of students enrolled increased 3.73% year on year to 290,927. The number of undergraduate, junior college/technical schools accounted for 49%/47%/4%, and the average tuition fee for students enrolled at the school was about 12,000/13,000 yuan respectively. We expect that in the future, after the completion of tasks such as the transformation of institutions, teaching review and evaluation, and renovation and expansion, etc., the scale of operations is expected to increase further, and the student structure is expected to continue to improve and promote a steady increase in the overall average tuition fee for students.
Continued optimization of debt structure, improvement in operating cash flow
The balance of bank loans and other loans for FY23 was $3.473 billion, a net decrease of nearly $700 million compared to FY22. The net debt-to-profit ratio fell from 13.6% to 6.5% year on year. With the optimization of the debt structure, we expect FY24-26's financing costs to gradually improve. FY23's net operating cash flow increased from 1,409 million yuan to 1,787 billion yuan year on year, gradually improving.
Risk warning: The increase in the number of enrolled students/the transition of independent colleges has fallen short of expectations, the competent authorities have tightened control over tuition pricing, and the progress of for-profit registration is slow.