Domestic business grew steadily and continued to receive a high percentage of cash dividends
China Education Holdings FY24H1 achieved revenue/ adjusted net profit of 32.84/1,217 billion yuan (yoy +18.3%/+10.2%); gross margin was 56 percent, which remained relatively stable. The company declared a 45% cash dividend. The domestic market achieved 19.2% growth, and the overall international business remained flat. We expect the adjusted net profit of the company FY24-F26 to be 21.08/23.61/2,587 billion yuan. The target price based on DCF valuation is HK$10.08 (WACC is 16.74%, sustainable growth rate is 1%, HKD/RMB 0.92). Maintain a “buy” rating.
Domestic business maintained medium- to high-speed growth, and middle employment business picked up
Domestic business growth was impressive. The domestic market segment of FY24H1 achieved revenue of 3.179 billion yuan, accounting for 96.8% of total revenue, an increase of 19.2% over the previous year, mainly driven by the increase in the number of students enrolled in higher vocational education and the average income per student. The number of students is expected to maintain a high single-digit year-on-year increase. The average tuition fee for the new academic year is 24,800 (a compound increase of 14% over the 19-24 school year). The international education business achieved remarkable results, and the number of students participating in international school programs increased 100% year over year. The middle vocational business is also gradually picking up. At Zhengzhou Secondary Vocational School, which previously calculated depreciation, the operating data for the new school year has picked up significantly. The school is actively introducing new course content, enrolling 4,569 students in the fall (yoy +28%) and enrolling 816 students in spring (yoy +44%), while increasing investment to upgrade the school level.
Continued investment in self-construction, continuous growth in production capacity
The company plans to invest 7 to 8 billion yuan over the next three years to expand the degree space by nearly 80,000. Among them, Guangzhou Zhaoqing University will reach 35,000 in the 25/26 academic year (40% increase from the 22/23 academic year), Yantai University will have 42,000 students in the 25/26 academic year (100% increase over the 22/23 academic year), and the four other schools in Haikou, Jiangxi will increase the number of students by 21,800, and the average capital expenditure for incremental students will be around 100,000 yuan. At the same time, teacher reserves were raised, and the number of teachers increased 19% year-on-year in the first half of the fiscal year. Increased investment in running schools has dragged down the company's gross profit. The company's FY24H1 gross profit was 1.84 billion (yoy +15.4%), and the growth rate was slower than the revenue growth rate. As the scale effect gradually becomes apparent, there is still plenty of room for long-term profits to be released.
Stable dividends in the medium term, with emphasis on shareholder returns
The company has sufficient cash reserves, with a cash reserve of RMB 4,531 billion as of February 29, '24. The interim dividend was RMB 18.77 points per share, accounting for 45% of adjusted net profit attributable to mother, which was significantly higher than that of peers.
Subsequently, as capital expenditure was reduced, the main education business had stable profits, and its ability to pay dividends was strong.
Risk warning: The competent authorities are tightening their supervision of tuition fees; the increase in the number of students enrolled falls short of expectations; and the progress of for-profit registration falls short of expectations.