The company's 1HFY24 performance is in line with the market's unanimous expectations. The dividend payout is stable, and the dividend ratio is attractive

The company announced 1HFY24 results: revenue of 3.28 billion yuan, up 18% year on year; adjusted net profit to mother of 1.09 billion yuan, up 4.5% year on year, all in line with consistent market expectations. The company announced a 1HFY24 dividend of approximately $491 million (HK20.68 cents per share), corresponding to a dividend payout ratio of approximately 45% and an annualized dividend rate of 10% (as of the close of April 26, 2024).

Development trends

Endogenous growth is steady. The company's 1HFY24 revenue increased 18% year over year, with the number of students enrolled increasing 9% year on year; as of February 29, 2024, the number of full-time students in the company increased 8.5% year on year to 271,000, mainly due to investment in early capacity expansion, teaching quality, and international integration of obstetrics and education, etc., and the number of full-time registered students in the 23/24 school year reached 97,000. By business, the revenue of the 1HFY24 domestic market segment increased 19% year over year to 3.18 billion yuan, mainly driven by the increase in the number of students enrolled in the domestic market and the average income per student; the revenue of the international market segment fell 2% year on year to 105 million yuan. At the employment level, the number of companies' school-enterprise partnerships increased year-on-year to more than 3,800 during the reporting period, and its schools sent 72,000 applied graduates. In terms of schools, 1HFY24's capital expenditure was 2.03 billion yuan, mainly due to existing campus buildings and school capacity expansion in Shandong and Guangdong provinces. Considering the steady growth in higher education demand, the company plans to invest an additional 3 billion yuan on top of the original capital expenditure of 5 billion yuan over the next three years to expand the original capacity of 52,000 students to nearly 80,000 students. Among them, Guangzhou Vocational College will increase the student capacity by 15,000, and the undergraduate campuses in Zhaoqing and Guangzhou will each increase the capacity by 5,000 people. We expect the company's capital expenditure to reach 4.5 billion yuan this year, corresponding to an average student capital expenditure of about 100,000 yuan, and an average annual return of about 18%.

Increased demand for higher education is driving increased investment in running schools. 1HFY24, the company's gross profit margin was 56.0%, down 1.4 percentage points year on year, mainly due to increased investment in campus construction and teacher remuneration; adjusted net profit to mother increased 4.5% year over year to 1.09 billion yuan, corresponding profit margin of 33.3%, down 4.4 percentage points year on year. This is an increase in management and depreciation expenses after the new campus was put into use. Management said that all convertible bonds were redeemed in March of this year. Currently, the Group's interest-bearing debt ratio is 24.7%, is at a healthy level, and has sufficient cash on hand. As of the end of February 2024, the company's cash and its equivalent exceeded 4.1 billion yuan. Considering the company's more aggressive expansion plans, we expect the company's revenue to achieve a compound growth rate of about 15% in the next three years, and adjusted net profit to mother will be slightly lower than the revenue growth rate, or achieve a compound growth rate of 8-10%.

Profit forecasting and valuation

The revenue forecast remained essentially unchanged; taking into account the increase in investment in running schools, the FY24/25 adjusted net profit forecast was slightly lowered by 1%/1% to $20.8/2.28 billion yuan. Maintaining an outperforming industry rating; considering the decline in the market valuation center, the company's target price was lowered by 37% to HK$6 (based on an adjusted EV/EBITDA of 5.0 times FY2024, current price traded 3.4 times), which has 41% upside compared to the current stock price.

risks

Higher education industry policies exceeded expectations; enrollment and tuition fees fell short of expectations.