Key points of investment

Xuedai Education released its 2024 semi-annual report: under a steady growth rate, profit margins continued to increase. According to the company's announcement, 24H1's total revenue was 1.62 billion yuan, up 29.4% year on year; 24Q1 and 24Q2 revenue increased +36%/+25% year on year, respectively, maintaining relatively rapid growth.

24H1 revenue growth by business: revenue from personalized education (traditional campuses) was 1.319 billion yuan, up 29.34% year on year; revenue from full-time education (training base, bilingual school) was 0.226 billion yuan, up 23.68% year on year; revenue from vocational education was 20.8348 million yuan, up 48.97% year on year; revenue from cultural reading was 12.5589 million yuan, up 373.14% year on year.

24H1 net profit to mother was 0.162 billion yuan, up 81.8% year on year; without taking into account share payment fees of 16.4838 million yuan, adjusted net profit of 0.178 billion yuan, up 100.4% year on year, close to the previous forecast limit (forecasted profit value of 0.13 billion yuan to 0.185 billion yuan), and adjusted net profit margin was +4pct year over year.

The slowdown in contract debt growth is related to seasonality

The 24Q2 education contract debt ratio was +20%, slightly slower than the revenue growth rate (+25%). We think it is mainly affected by seasonality. 24Q2 is the peak season for the industry, and one-on-one high school training will concentrate on canceling classes before the college entrance examination. Taking 2013 as an example, 23Q1-23Q4 contract liabilities were +12%/+7%/+14%/+20%, respectively. Among them, contract debt growth in the second quarter was slower than in other quarters, while 23Q3 revenue maintained a relatively rapid growth of +32% year over year.

Operating efficiency has improved, financial expenses have been optimized, and revenue structure adjusted, and profit margins have improved markedly over the same period last year.

The 24H1 gross profit margin was 36% (35% for the same period in '23), and the net profit margin for 24H1 was 11% (vs 7.1% for the same period in '23), which is a further increase over the previous year, and is at a historically high level. Further improvements in profitability are due to improved operating efficiency (increase in the full class rate of individualized teaching centers and full-time bases), revenue structure adjustments (the proportion of full-time classes gradually increased, and we estimate it to increase from around 19% to close to 27% in '23), and financial cost optimization (from 0.032 billion yuan in 23H1 to 0.025 billion yuan in 24H1).

Xuedai actively repaid the loan. As of the 2024 semi-annual report disclosure date, the company's remaining loan principal amount to Ziguang Zhuoyuan was about 0.199 billion yuan (0.464 billion yuan as of the disclosure date of the 23rd annual report), and there is still room for optimization of financial expenses.

The acquisition of new higher vocational colleges has had a positive impact on the company's profitability, helping to open up vertical integration capabilities in vocational education, and to embrace the steady and far-reaching implementation of national policies.

According to the announcement, the company plans to gradually acquire 90% of the interests of Yueyang Modern Service Vocational College (Yueyang Senior Vocational) for 214.2 million yuan. According to the company's official WeChat account, the Yueyang Higher Vocational City Lingji Xingang Campus is expected to be put into use in September this year. The plan is to enroll 4,500 students from all over the country in the first year, and the number of students can reach 10,000 starting in the fall of 2025. We expect that the company will join the operating company first. The school's climbing period will not have a negative impact on profit margins, and the school merger will not be completed gradually until the school's operation is mature. We expect that the implementation of this project will have a positive impact on the company's performance and profit margin. The profit margin and business stability after completing the enrollment climb for senior employees in Yueyang will be far higher than the current business.

We believe that after the adjustment of the education and training policy in '21, if we can balance profitable vocational education programs while developing the company's dominant business, it will help the company to move steadily and far-reaching in the new normal, and the long-term significance is extremely positive. Moreover, the profitability of vocational education is not necessarily weaker than the traditional main business of the company. The key is the usefulness of learning vocational education skills in schools and the depth of skills that are more threshold than general blue-collar jobs, so it greatly tests the ability to penetrate vocational education vertically (from middle to senior positions to deep integration of maternity and education). Therefore, the promotion of the Yueyang Senior Vocational Program reflects the company's in-depth strategic thinking on the development of the field of vocational education.

Focus on the pace of capacity expansion in the personalized teaching business

According to the semi-annual report, the company has more than 240 personalized learning centers. It is recommended to focus on the pace of expansion in the second half of the year and the compatibility of new admissions. However, the growth of new learning centers will have a more positive impact on FY25 earnings growth.

Profit forecasting and valuation

Xuedai Education is actively transforming, and revenue structure optimization drives profit margins upward, and subsequent expansion of production capacity may drive revenue to maintain a relatively rapid growth rate. We expect that the 2024-2026 revenue will reach 2.9/3.74/4.42 billion yuan, respectively, and net profit to mother will reach 0.25/0.38/0.5 billion yuan in 2024-2026, respectively. The corresponding PE is 26.39x/17.79x/13.55x, maintaining the “buy” rating.

Risk warning: Off-season enrollment growth in the second half of the year fell short of expectations; profit margins were under phased pressure after starting expansion; new business development fell short of expectations.