Net profit for the first half of the year increased 16.0% year-on-year

Chunlai Education achieved revenue of 8.1 million yuan (RMB, same below) in the first half of fiscal year 2024, up 8.7% year on year, slightly lower than expected. Revenue growth was mainly due to higher tuition fees. Among them, tuition and accommodation fees increased 9.1% and 4.7% year on year, respectively. The gross profit margin for the first half of the year was 60.7%, down 2.2 percentage points year over year. The company began strict control of expenses last year. Under cost reduction and efficiency measures, operating expenses in the first half of the year were the same as in the same period last year. The cost rate fell from 15.6% to 14.7%, and operating expenses were lower than expected. The company's net profit for the first half of the year was 380 million, up 16.0% year on year. The net profit margin was 47.2%, and the profitability was in line with expectations. The company also announced an interim dividend of RMB 0.0907 per share, increasing the dividend ratio to 30%, higher than expected.

Future outlook: increase in student numbers, optimization of capital structure

The total number of students enrolled in the 2023/24 school year was 104,000, the same as the previous year, and slightly lower than expected, mainly because some schools took the initiative to reduce the number of students enrolled during the evaluation by the supervisory authorities. We forecast that the number of students enrolled will return to around 120,000 in the 2024/25 school year, an increase of 14.7% over the previous year. By the end of February, the company's interest-bearing loans totaled 1.88 billion yuan. The company plans to reduce its liabilities, replace high-interest loans with lower-interest loans, and reduce interest expenses. Interest expenses for FY24E are forecast to be 93 million, down 25.4% year over year. The net debt/equity ratio declined from 42.2% in FY23 to 28.6%. The capital expenditure for the first half of the year was about 230 million yuan, and a total investment of 400 million yuan is expected for the whole year, mainly for the construction of Tianping University and upgrading and maintenance of other school facilities. Under multiple effects, we expect FY24E's net profit of 750 million yuan, an increase of 10.0% year over year.

FY24E-FY26E net profit CAGR 20.7%

Under the premise that Tianping University is not consolidated, net profit is expected to grow from FY24E's 750 million to FY26E's 1.1 billion, or 20.7% CAGR. The company expects Tianping College to be completed within the 2025/26 academic year. The company's endogenous profit growth has remained steady. In the future, the Jiangsu School will help further increase net profit and maintain a dividend payout rate of at least 30%. The company is currently valued at 7.1 times/5.8 times the FY24E/25E price-earnings ratio. The company has been transferred to the Hong Kong Stock Connect list since March, which has helped increase liquidity and trading volume.

Investment risk

1: Uncertainty about choosing to become a “for-profit” school; 2: The number of places/enrollment is lower than expected; 3: The uncertainty of the merger of Tianping College.