China Oriental Education announced its 2023 results, with revenue of RMB 3.98 billion, up 4.2% year on year, and adjusted net profit of RMB 280 million, up 5.4% year on year. The company's revenue and profit growth fell short of our expectations.
Enrollment pressure is still ongoing, and the growth rate of trainees is slowing down. The number of new trainers in the company reached 151,800 in '23, an increase of 13% over the previous year, down 20% from the first half of the year. The average number of trainees was 146,800, a slight increase of 2.9% over the previous year. It was also 0.3% lower than 147,000 visits in the first half of the year. Against the backdrop of a slow economic recovery, the growth of company trainers is weak.
The contraction in gross profit stemmed from rising rental costs. The company's gross profit for 23 years was 1,908 billion yuan, up 0.9% year on year. The growth rate was weaker than revenue growth. Gross margin was 48%, down 1.5 percentage points year over year. We believe that the operation of some leased campuses was maintained even after the company invested in building its own regional center, leading to an increase in rental costs, which in turn eroded gross profit. With the maturity of self-built regional centers and the cancellation of leased campuses, and after the company's capacity utilization rate will steadily increase as the average number of trainers increases, we believe that the company's gross profit will rise steadily over 24 years.
Marketing expenses are still rising, and the average student enrollment costs are improving at the beginning. The company's annual sales expenses reached 1,036 billion yuan, an increase of 9.6% over the previous year, exceeding the revenue growth rate. The marketing expense ratio was 26.1%, an increase of 1.3 percentage points over the previous year, and continued the trend of last year's growth.
The enrollment fee is related to the number of new trainees. The average enrollment fee for 23-year students was about 6,832 yuan, a decrease of 3% over the previous year. We expect that in '24, the company will strictly control marketing expenses and divide the tasks into colleges and universities to strictly implement them, and the marketing expenses rate will show a downward trend. At the same time, the company also optimized its staffing. While guaranteeing a 2.9% increase in the number of teachers, the total number of employees was reduced to 10,881, a year-on-year decrease of 6.8%. The number of non-teacher employees was 5,660, a year-on-year decrease of 14.2%. As a result, the management expenses rate was further controlled to 13.3%, down 0.1 percentage points from the previous year.
The construction of regional centers ensures long-term growth. The company has planned 8-10 regional centers in Chengdu, Jinan, etc., and the capacity of a single school will reach more than 15,000 people. Referring to the Group's Anhui Regional Center Project, the number of students enrolled is over 25,000. We expect that after the completion of the regional center, the average number of trainees in the Vocational Education City Project will exceed 200,000. Combined with the number of people trained at non-regional centers, the total number of students enrolled is expected to exceed 300,000. At the same time, thanks to the construction of regional centers, campus hardware conditions will meet the standards of secondary vocational or technical schools. After obtaining a secondary school or technical school license, the competitiveness of schools under Oriental Education will continue to increase.
Downgraded to an increase in holdings rating. Since enrollment is still full of challenges, the control of the company's marketing expenses will influence the improvement of operating efficiency and the release of profits. We lowered our adjusted net profit for 24/25 to $319.369 million (the original forecast was $65/ 881 million yuan), adding an additional adjusted net profit of $411 million for 26 years. Our target price for DCF is HK$2.82, which corresponds to an increase of 17.2% and was downgraded to an increase rating.
Core hypothesis risk: Oriental Education's enrollment falls short of expectations; academic license applications fall short of expectations.