Introduction to this report:
Endogenous growth is steady, and performance is in line with expectations; as a leading private higher education provider, the company has plenty of cash on hand, and campus expansion drives endogenous growth.
Summary:
The performance was in line with expectations, and the “gain” rating was maintained. We forecast revenue for the 2024-2026 fiscal year to be $64.69/74.31/8.519 billion, respectively, and net profit to mother of $21.05/23.17/$2,548 billion, respectively. We give FY2024 a 10x PE valuation, with a target price of HK$8.98, maintaining an “gain” rating.
Performance summary: In the first half of fiscal year 23/24, the company achieved revenue of 3.284 billion yuan/yoy +18.3%, gross profit of 1,839 billion yuan/yoy +15.4%, and adjusted net profit of 1,217 billion yuan/yoy +10.2%. The overall performance was in line with expectations. In the first half of fiscal year 23/24, the company's gross margin fell 1.41pct to 56.00%, the sales expenses ratio was 2.71% /-0.43pct, and the management expenses ratio was 14.49% /+0.55pct, mainly due to the increase in the number of students, the increase in teachers and teaching investment, and the new campus and buildings were put into use and depreciation began to be confirmed. The financial expenses ratio remained stable at 6.85% for the same period.
Endogenous growth is steady, and sharp increases in volume and price drive revenue growth. Earnings in the first half of FY23/24 increased 18.3% year over year, with student numbers increasing 9% and average student income increasing 9%. By dividing revenue by business, the domestic market segment achieved revenue of 3.179 billion yuan/yoy +19.2% in the first half of fiscal year 23/24, mainly driven by the increase in the number of students enrolled in the domestic market and average income per student; the international market segment achieved revenue of 105 million yuan/yoy -1.87%. The private higher education sector gave full play to its role as an employment reservoir. In the 23/24 school year, the number of students enrolled full-time in the company's domestic schools was about 97,000/yoy +17%, and the number of new students enrolled in colleges and universities reached 84,000/yoy +18%; as of August 2023, there were about 248,000 full-time enrolled students /yoy +7%, and 19.9,000/yoy +13% of full-time higher education students.
The dividend ratio was further increased, and endogenous expansion drove growth. The company further increased the dividend ratio to give back to shareholders and declared an interim cash dividend for the 23/24 fiscal year (corresponding to 45% of the adjusted net profit). By default, the dividends are paid 100% in cash. Looking at the medium to long term, China has established a two-track system of comprehensive employment integration to promote the high-quality development of vocational education and clarify the direction of policy support for vocational education. As of February 29, 2024, the company had cash reserves of 4.531 billion yuan, with sufficient cash in hand, which can be used to expand and invest in the endogenous campus network. With the expansion of college campuses in Guangdong Province and Shandong Province, school capacity has been further increased, and endogenous growth can be expected to continue.
Risk warning: Campus expansion and student population growth falling short of expectations, risk of policy regulation fluctuations, etc.