24H1 revenue and profit are in line with the forecast, and stable cash out reduces losses

Kevin Education 24H1 achieved revenue of 0.152 billion yuan (yoy +18.92%) and net profit to mother of 9.88 million yuan, a year-on-year loss reduction of 51%. Among them, 24Q1/Q2 revenue growth rates were YOY +12.93%/25.76%, respectively, and net profit to mother narrowed by 66.66%/33.58% year-on-year, respectively, and steady cash out reduced losses. We are optimistic that the company will take advantage of its state-owned background to continue to integrate high-quality education and technology industry resources to promote the steady development of various businesses.

We maintain our net profit forecast for 24/25/26 at 5.76/24.44/31.57 million yuan, maintain the DCF target price of 5.16 yuan (WACC is 7.66%, sustainable growth rate 2%), and maintain an “incremental” rating.

International education has achieved excellent results, and domestic projects have been added to broaden revenue sources. The company has implemented a parallel development strategy of K12 international+domestic education. The international community continues to deliver outstanding teaching results. The acceptance rate for the 24th year graduates of Haidian Kevin School is 100%, the US Top 30 acceptance rate is 55%, the UK Top 5 acceptance rate is 71%, and Australia's top eight acceptance rate is 100%. Domestically, the two Kevin schools have each added domestic-oriented programs for different school segments. The Chaoyang Kevin School Premium Quality High School class officially started in the fall of 2023, and the Haidian Kevin School Primary School Jingrun Mathematics Special Class (Year 1) will start in the fall of 2024, which is expected to increase revenue sources.

Multi-party collaboration enriches vocational education resources, and the business scope is expected to be further expanded. The company will continue to strengthen cooperation with leading companies to carry out vocational education. 24H1 officially became a Huawei certified ICT service partner and signed a training and certification cooperation agreement with Baidu in the field of generative artificial intelligence, which is expected to further enhance the competitiveness of vocational education enrollment. In addition, the company signed a strategic cooperation agreement with the Zhongguancun Institute of Science and Technology Innovation. The two sides agreed to cooperate in five major areas, including party and government cadre training, enterprise management training, operation services and double teacher training, development and design of training courses for the entire science and technology innovation industry chain, and continuing education and training for principals, directors, and teachers across the country, which is expected to further broaden the scope of business.

The impact of depreciation and amortization expenses on profits is expected to gradually decrease

The company holds the fixed assets and office building assets of the two Kevin School sites. The depreciation and amortization expenses generated by the two are one of the main reasons why the company's operating performance continued to lose several years. 24H1's investment real estate amortizes about 24.58 million yuan. Considering that the current expansion of the company's foreign business is mainly based on an asset-light operating model, the asset structure is expected to be gradually optimized, and the negative impact of depreciation and amortization on profits is expected to gradually decrease.

Risk warning: The number of students enrolled in vocational education falls short of expectations; there is a risk of shortage or loss of teachers and core management personnel; real estate rental rates fall short of expectations.