Cost reduction and efficiency were significant, and net profit increased by 26.0%

Jianqiao Education's FY23 achieved revenue of 9.3 billion yuan (RMB, same below), with tuition and accommodation revenue growth rates of 12.5% and 57.0%, respectively. Due to FY22's containment due to the pandemic, the school refunded part of the accommodation fee, so the FY22 base is low. Starting in the second half of the year, the company adjusted the depreciation period for building facilities from 50 to 30 years, resulting in additional depreciation expenses of $16 million. This resulted in FY23 gross margin falling 2.1 percentage points year over year to 61.8%. The company achieved significant cost reduction and efficiency. The ratio of sales and administrative expenses decreased from 25.4% to 21.8%, so the net operating profit margin increased 1.7 percentage points to 43.5%.

The company's net profit was 280 million, up 26.0% year on year. The performance was in line with expectations, and the company's profitability was steady. The company also announced a year-end dividend of HK$0.1 per share, with a dividend payout ratio of 26.1% for the whole year, slightly lower than market expectations.

Estimated FY24E capital expenditure of 170 million

Jianqiao Education enrolled 25,000 students in the 23/24 school year, and the school bed usage rate was over 90%. In order to improve operating conditions, enrich curriculum resources, and establish more applied majors according to the talent demand structure, the school's fourth phase project is already under construction. The construction area of the project is 86,000 square meters, including a teaching and training building, three talent apartment buildings, and a multi-functional R&D center. It is expected to be put into use in June 2024. The total investment for the fourth phase of the project is about 350 million yuan, of which capital expenditure has already been incurred in FY23 is about 260 million. The remaining portion will be included in the capital expenditure for the FY24E fiscal year. We expect FY24E capital expenditure to drop to $170 million.

The gross profit margin was lowered, and the target price was adjusted to HK$4.45

In the period 2020-2022, special education and college enrollment expansion policies were implemented, and this group of students gradually entered the graduation season. If the enrollment expansion policy is not continued, the number of new students enrolled and the growth in the number of students enrolled will slow down. We forecast FY24E's revenue of 1.03 billion yuan, a decrease of 4.0%; due to the adjustment of the building depreciation period, we lowered the FY24E gross margin forecast by 1.7 percentage points to 62.4%. However, at the same time, we cut operating expenses by 5.2%; maintaining FY24E's net profit forecast of 320 million, an increase of 12.9% over the previous year. The FY26E forecast was introduced, and due to reduced liquidity, the valuation target was adjusted to 5 times the FY24E price-earnings ratio, and the target price was lowered to HK$4.45 to maintain the purchase rating.

Investment risk

1) Enrollment fell short of expectations; 2) Campus expansion fell short of expectations; 3) Vocational education policy risks.