The company's FY2023 performance continued a steady growth trend. Revenue/adjusted net profit increased by 18%/10% respectively. The training sector in China continued to grow steadily, driven by both the average number of students and the increase in average tuition fees. Revenue was +18.2% year over year, and the number of overseas education enrollment increased close to 100% year over year. Although short-term company statements are affected by the pressure of one-time impairment of goodwill and rising interest rates on US bonds, and rising interest rates on US bonds over a long period of time to provide room for long-term population growth, we are optimistic that the company's performance will achieve steady growth, while the high cash dividend policy highlights investment value. We believe that the company's valuation is expected to recover and maintain its “buy” rating.

Revenue and adjusted profit increased 18%/10% year over year, and performance continued to grow steadily under pressure from short-term financial expenses.

The company achieved: 1) Revenue and gross profit in FY2023: Revenue of 5.616 billion yuan (+18%), gross margin of 56.3% (-1.6pcts). 2) Expenses: The sales expense ratio is 3.2% (-0.4pct). The management fee rate was 13.8% (-1.4pcts), mainly due to depreciation and an increase in the number of students due to the company's new campus put into use. Financing costs increased by 52% to 469 million yuan, and the financial expense ratio increased by 1.9pcts to 8.4%, mainly due to the increase in the cost of floating interest rate debt in US dollars in corporate loans and capitalization interest expenses for some property, school buildings and equipment costs. As of FY2023, corporate banking and other loans fell slightly from 8.89 billion yuan to 8.6 billion yuan. 3) Profit: EBITDA/adjusted EBITDA was 2,762 billion yuan (-5%) /3.361 billion yuan (+18%) respectively, net profit from the mother and adjusted net profit were 1,380 million yuan (-25%) /1,908 billion yuan (+6%), respectively, and the adjusted net profit margin was 34.0% (-3.8pcts). The gap between adjusted performance and reporting performance is mainly due to the company's Henan Secondary Vocational School's goodwill impairment of 458 million yuan (395 million yuan after deferred taxes are deducted).

4) Cash: Capital expenditure was 2,637 billion yuan, an increase of 23% over the previous year, mainly for the construction of new campuses in Guangdong and the expansion of existing campus buildings. As of August 31, 2023, total bank balance and cash was $5.802 billion, and the interest-bearing balance ratio was 24.1% /-2.4pcts.

The increase in enrollment and tuition fees is driving steady growth, and overseas business enrollment is growing rapidly. 1) Revenue and profit by business: FY2023's domestic education revenue was 5.396 billion yuan (+18.2%), contributing pre-tax profit of 2,482 billion yuan (+15.6%); international education revenue was 220 million yuan (+16.4%), and pre-tax profit was 34 million yuan (-33.3%). The company's domestic business maintained steady development driven by the increase in the number of students enrolled in the higher education sector and the average tuition fee. Among them, the number of students enrolled in the company increased by about 10% year on year, and the average student income (excluding British school students and continuing education students) reached 23,000 yuan (+8.9% year-on-year). The number of students enrolled in the company's FY2023 overseas business increased by nearly 100% year on year. 2) Number of new students enrolled: The total number of new students enrolled by the company in the 2023-2024 academic year was 83,600 (+18%). By type, the number of new students enrolled in higher education (excluding continuing education) was 34,993 (+5%), the number of new students enrolled in special education was 27,120 (+13%); the number of new junior college students enrolled was 21,441 (-7.60%); the quota utilization rate increased by 1.3 pcts to 91.6% over the same period last year.

Continued investment in capacity expansion provides room for performance growth, and the investment value of the high dividend policy is remarkable. 1) Continued investment in capacity expansion lays the foundation for growth. The third phase of the construction of the company's new campus in Zhaoqing began successfully in FY2023. The FY2023-2024 campus capacity is expected to reach 50,000 people, providing space for further growth in the number of students enrolled. The company has started construction of a new campus in Yantai, with a total plan of 700 acres, which is expected to reach 42,100 people in FY2025-2026. At the same time, the company will continue to complete the expansion of new school buildings and dormitories in Jiangxi and other places, providing space for increased capacity and higher average student income. 2) Continuation of high cash dividends: The company plans to pay a dividend of HK$0.33 per share in FY2023, accounting for about 40% of adjusted net profit. Continuing the high cash dividend, the corresponding company's stock price dividend ratio reached 6.7% on November 29, 2023.

Risk factors: School expansion progress falls short of expectations, student growth falls short of expectations, changes in education industry policies, tuition fee increases that fall short of expectations, etc.

Profit forecast, valuation and rating: Considering the increase in depreciation and management expenses brought about by the company's investment in the new campus, we lowered the company's core net profit forecast for the 2024-25 fiscal year to 21.2/30 billion yuan (the original forecast was 22.4/2.48 billion yuan), adding 2.51 billion yuan to the 2026 core net profit forecast. Comprehensive company historical valuation centers (10 times PE) and comparable higher education companies (Hope Education, Neusoft Education, China Science and Technology, etc.) 2024 valuation levels (generally around 3 times PE, wind unanimous expectations) gave the company 6 times PE in 2024, corresponding to the target price of HK$5.5, maintaining a “buy” rating.