Key points of investment
The high increase in HKU education revenue, benefiting from clear supply and demand resilience, Xuedai Education's revenue in 2023 was 2,213 billion yuan, up 23.09% year on year; 24Q1 revenue was 705 million yuan, up 35.97% year on year. 23Q2-24Q1 University education revenue was +30.82%/+32.09%/+26.81%/+35.97%, respectively. Looking at forward-looking indicators, contract debt reached $720 million in 24Q1, +23.52% year-on-year, which also showed positive demand. Since 23Q2, the university's education revenue has maintained a relatively rapid growth, fully benefiting from the resilience of industry demand and clear supply.
Profitability improved, profit margins continued to recover
Xuedai Education's net profit to mother in 2023 was 154 million yuan, up 1035.24% year on year; 24Q1 net profit to mother was 50.18 million yuan, up 886.44% year on year. The reason behind the improvement in profitability is the increase in gross margin brought about by the optimization of the class structure and the dilution of cost ratios due to the optimization of the competitive environment.
1) The increase in gross margin was mainly due to the increase in the share of income of full-time base classes: the gross margin of the education and training service industry in 2023 reached 36.36% (vs the average for 2017-2022 was 26.85%), a change of +9.51pct from the average value. The significant increase in gross margin was due on the one hand to an increase in the number of classes led by a single teacher, and on the other hand, benefited from class structure optimization (the development of full-time base group classes, the gross margin was higher than the one-on-one model).
2) Sales expense ratio optimization: The sales expense ratio in 2023 was 7.43% (vs the average in 2017-2022 was 8.14%). The change from the average value was -0.71 pct, and the cost ratio was diluted.
3) The increase in the management fee rate is related to equity incentives: the management fee rate in 2023 was 15.67% (vs the 2017-2022 average was 13.54%), a change of +2.13pct from the average value. The share payment fee for 23 years is approximately RMB 14.06 million. According to the announcement, the 23 equity incentive is expected to incur expenses of RMB 2918.12/1406/4952 in 24-26, respectively.
4) The financial expense ratio benefits from Ziguang Loan's continuous repayment: As of the disclosure date of the 23rd annual report, the company's remaining loan principal amount to Ziguang Zhuoyuan was about 464 million yuan, and there is still room for optimization of financial expenses.
5) Net interest rate to mother: The net interest rate for 23Q2-24Q1 college education was 11.43%/5.2%/8.77%/7.12%, respectively. The profit margin was greatly increased compared to the past, and the logic of improving profit margins due to supply clearance was further verified.
Profit forecasting and valuation
The active transformation of university education has benefited from clear supply and resilient demand, showing good recovery and development. Combined with Xintuo Vocational Education, the company's revenue growth is driven; the competitive landscape is improved, operating leverage is driving, and financial expenses tend to be optimized, and profits are expected to continue growing faster. We expect the net profit of Xueda Education to reach 2.41/3.48/449 million yuan in 2024-2026, respectively, and the corresponding PE is 33.80x/23.41x/18.16x, respectively, maintaining a “buy” rating.
Risk warning: New business development falls short of expectations; competitive environment intensifies.