High sales growth dragged by rising costs and tax expense

CEG reported 1HFY24 results with sales growth of 18.3% YoY beating consensus estimate, and a slower net profit growth of 4.5% YoY, mainly dragged by a 19.2% YoY increase in SG&A cost and higher effective tax rate. CEG plans to invest RMB3,000m to expand its campus capacity by 25,000 students in the next 2-3 years, bringing the FY24 annual CAPEX guidance to around RMB4,500m. 1HFY24 dividend payout ratio is 44.7%. We slightly cut our earnings estimates and trim TP to HK$7.14 by applying an unchanged target multiple of 8x FY24E P/E. New TP implies 68% upside. BUY rating is retained.

Key Factors for Rating

CEG reported 1HFY24 results with sales up by 18.3% YoY to RMB3,284m, of which the growth in student number and average income per student each contributed approximately 9% of the growth. However, the 19.2% YoY increase in SG&A cost and 98.3% YoY growth in tax expense all outpaced the top-line revenue growth, with net profit only recording a 4.5% YoY growth. The high growth in SG&A cost mainly resulted from the rising staff cost due to increasing number of students, while the effective tax rate soared from 3.1% in 1HFY23 to 7.6% in 1HFY24 because CEG's educational service company has just begun to generate revenue. We expect CEG's effective tax rate to climb afterwards.

CEG announced to increase its CAPEX plan to expand its campus capacity in response to recent strong demand. CEG has just announced to invest RMB3,000m to expand capacity by 25,000 students in the next 2-3 years. Previously, CEG announced to invest RMB52,000m to add capacity by 52,000 students. In aggregate, CEG is expected to expand its capacity by 77,000 students in the next 2-3 years. In current 2023-24 academic year, CEG's number of students has increased by over 20,000, from which the company saw strong growth potential and gained supports from local governments. We reckon CEG's capacity will drive future sales growth, but the annual CAPEX guidance of RMB4,5000m exceeds investors' expectation.

CEG is actively improving its average income per student through increasing the proportion of undergraduate students and promoting international programmes. As the tuition fees for undergraduate students are higher than those for junior college students, CEG has actively improved the proportion of undergraduate students. Also, through promoting the international programme, CEG encourages students to study abroad through offering paid overseas consulting services, which will hopefully become another growth driver.

Key Risks for Rating

The higher-than-expected CAPEX may bring concerns among investors.

Valuation

We revise up the sales growth to 18.3% YoY, but slightly trim the earnings forecast in 2HFY24. We slightly cut our TP to HK$7.14 by applying an unchanged target multiple of 8x FY24E P/E. The new TP implies 68% upside. Retain BUY.