FY20 revenue/core net profit was 555 million yuan/203 million yuan, which is generally in line with market expectations.
The annual dividend was HK$0.18 per share, with a payout ratio of approximately 33.6%. The main reasons for the increase were (1) the increase in average tuition fees (+6.9%) and (2) the increase in the number of students (+11.5% in the 19/20 academic year), which increased gross margins and net margins to 60.4%/36.5% from 55.8% and 30.1% last year. The total number of students in the 20/21 school year has reached 21,338 (up 7.5% year over year), and the admission score line has increased further to 424 (418 last year). Undergraduates in the 20/21 academic year still make up around 88% of total students, one of the highest percentages in the industry.
The company is applying for the conversion of a “for-profit school”, and the tax rate is likely to rise to 15% after completion (FY20:2.5%), but future tuition fee adjustments will have more flexible independent decision-making power and a clearer definition of property rights to school assets. The company's current forecast price-earnings ratio for 2021/22 is 7.9 times/6.9 times. The valuation is similar to that of small higher education companies in the same industry. Despite having a very high quality college, the company's stock price still seems to lack catalyst and merger and acquisition capabilities in the short term has yet to be confirmed.
Unique geographical advantages ensure long-term student growth
Currently, about 53% of students are from non-Shanghai regions. Management believes that the following factors will provide Shanghai with sufficient students in the future, including (1) the school's appeal in first-tier cities, (2) the development of the Lingang New Area provides more employment opportunities for graduates, thereby attracting more students from other provinces, and (3) the number of babies born in Shanghai increased from 620,000 in 2002 (number of college candidates in 2020) to 121,000 in 2012.
Tuition fees will continue to rise, but in the 21/22 school year, we think the number of students will increase or there will be a bottleneck. Management expects the tuition fees for all undergraduate students to be raised to more than 30,000 yuan in the 21/22 academic year, which will be the main driving force for profit. Tuition fees for the 22/23 school year will depend on successful conversion into a for-profit school. Referring to local peer data, they think there is enough room for tuition fees to be raised for bridge construction after the conversion is completed (local peers: $45,000 to $50,000 in tuition). Considering that the current enrollment is close to 97% of the number of admissions available, we think the total student growth rate for the 21/22 school year will slow to 3% until the new school building is completed in the 22/23 school year to drive enrollment capacity to 26,000 students (currently around 22,000). Overall, they expect core profits to grow by over 30% in FY21.