FY23 revenue grew steadily, and one-time impairment and US dollar interest had a short-term impact on the profit side:
Benefiting from endogenous growth in the higher education business, FY23's revenue was +18.1% year-on-year to about 5.62 billion yuan. One-off impairment and financial costs for middle employees in Zhengzhou increased, resulting in net profit of -25.2% year-on-year to 1.38 billion yuan.
(1) In terms of profit, gross profit was +14.9% year-on-year to $3.16 billion, and gross margin was 56.3% (57.9% in the same period last year). The decline in gross margin was mainly due to new campus construction, depreciation expenses, teachers and education investment. Excluding the effects of one-time impairment and exchange, the adjusted net profit to mother was +6% YoY to $1.91 billion, and the adjusted net interest rate to mother was 34.0%, -3.9pp; adjusted EBITDA was +18% YoY to $3.36 billion, and the adjusted EBITDA rate remained flat at 60% year over year. (2) The increase in US dollar interest rates led to a significant increase in financial expenses. The company's sales/management/financial expense ratios were -0.3 pp/ -1.4 pp/ +1.9 pp to 3.2%/13.8%/8.4%, respectively, year-on-year during the period. The balance of loans in US dollars at the end of the period was approximately US$200 million, accounting for 1/6 of the total loan amount. (3) A one-time goodwill and intangible asset impairment of 395 million yuan was charged to Zhengzhou Urban Rail Secondary Vocational School during the period, mainly due to natural disasters and a decline in the number of new students enrolled. Currently, the number of students enrolled in secondary vocational schools in Zhengzhou has rebounded compared to the same period, but it has not returned to pre-epidemic levels. (4) In terms of cash and liabilities, as of the end of the 8/31 period, the company had cash reserves of 5.8 billion yuan, operating cash flow of 3.85 billion yuan during the period, and capital expenditure of 2.6 billion yuan, mainly due to the expansion of campuses in the Greater Bay Area and Shandong campuses and the renovation of existing campuses. The interest-bearing debt at the end of the period was about 8.9 billion yuan, and the interest-bearing balance ratio was -2.4pp to 24.1% year-on-year. (5) The annual dividend distribution ratio is 40%.
The higher education business is growing steadily, the number of new students enrolled has increased significantly, and the middle vocational business is under pressure:
Dividing the driving forces of growth, income increased by 18% during the period, and the increase in the number of students enrolled and the increase in average income per student each accounted for half. The higher education business is growing steadily for full-time students and new enrolments. The reason why the middle vocational business is under pressure is that under the current system of further education, parents prefer more college-oriented secondary vocational colleges. As of 2023/8/31, the number of full-time students enrolled in domestic member schools was +7% to 248,000, including higher education +13% to 199,000, and -11% to 49,000 in middle education. In terms of new enrollment, there were +17% to 97,000 full-time enrolled students in the 2023/24 academic year, of which +18% to 84,000 students enrolled in full-time higher education.
Maintaining a buy rating, target price of HK$7.60:
The company insists on running high quality schools, and the member schools are of good quality. It is expected that the risk of impairment of higher education member schools will be manageable in the future. Schools in the Greater Bay Area and Shandong have sufficient capacity, and endogenous growth is sustainable in the medium term. The policy strongly supports vocational education. The catalyst for future industry valuation recovery is the implementation of for-profit options in higher education schools one after another. Revenue from FY24 to FY26 is estimated to be 64.4/73.2/8.28 billion, +14.7%/+13.1% YoY, and net profit to mother of 21.4/24.5/2.78 billion yuan, +55.2%/+13.7% YoY.
Maintaining the buy rating, the target price is HK$7.60, which corresponds to about 8 times FY24 PE.