Revenue for the first half of 2024 was slightly lower than market expectations, and adjusted net profit to mother exceeded market expectations, China Oriental Education announced results for the first half of 2024: revenue of 1.98 billion yuan, up 1.6% year on year, lower than market expectations, mainly because the number of new students enrolled was less than expected; adjusted net profit to mother increased 57.9% year over year to 0.278 billion yuan, higher than market expectations, mainly because cost control was better than expected.

Development trends

New enrollment has slowed down due to strategic adjustments. In the first half of 2024, the number of new students enrolled in the Group fell 7.7% year on year, and the average number of trainees fell 1.7% year on year, mainly due to the company's optimization of the sinking market strategy (reducing the layout of some colleges and merging operations with some brand colleges) and adjusting the product structure (focusing on medium- and long-term majors with high unit price and high added value). As of June 30, 2024, the number of schools decreased by 11 compared to the end of the previous year; management said that the school shutdown adjustments have basically been completed, and we expect the number of schools to resume normal growth. By sector: 1) Cooking Technology (New Oriental, Delicious Academy) division revenue/number of new students -3.3%/-11.2%; 2) Pastry Western Food (Omic) division revenue/number of new students -0.8%/-12.9%; 3) Information Technology and Internet Technology (Xinhua Computer, Huaxin Zhiyuan) division revenue/number of new students -4.3%/-11.1% YoY; 4) Auto Service (Wan Tong) division revenue/number of new students enrolled +11.1/% -3.6% year-on-year; 5) Fashion and beauty industry (Aumandi) Division Revenue/Number of New Enrollment YoY + 142.1%/+88.1%. Looking ahead to the second half of 2024, management's results will indicate that the company's revenue is expected to grow 5% year over year.

Profitability is improving steadily. In the first half of 2024, the Group's overall gross margin was 53.0%, up 1.9ppt year-on-year. By sector, the Cooking Technology, Western Food, Auto Service, and Fashion and Beauty segments all achieved year-on-year improvements in gross margins, up 2.6 ppt, 6.8ppt, 2.3 ppt, and 16.7ppt respectively from the previous year, mainly due to effective cost control; the gross margin of the information base segment remained basically the same as in the same period last year. The adjusted net interest rate for the current period reached 14.0%, an increase of 5ppt over the previous year, mainly due to proper cost control and cost control. Looking ahead to the full year of 2024, management will maintain the adjusted net profit guideline of 0.4 billion yuan unchanged (according to the results meeting); considering the regional center construction plan, management expects capital expenditure to remain at a high level of around 1 billion yuan in 2024 and 2025.

Profit forecasting and valuation

Considering the company's strategic adjustments, the 2024 and 2025 revenue forecasts were lowered by 5.3%/7.0% to 4.1 billion yuan/4.3 billion yuan; considering that the company's cost and expense control results were better than expected, the adjusted net profit forecast was raised by 9.8%/3.2% to 0.405/0.465 billion yuan. Maintain the outperforming industry rating and target price of HK$3.5 (based on 4x 2024e adjusted EV/EBITDA). The company is currently trading at 3x 2024e adjusted EV/EBITDA, corresponding to 47% upside.

risks

Competition intensified; enrollment fell short of expectations.