Event: 2020H1's total revenue/adjusted net profit increased by 8.8%/16.9%. The company's total revenue for 2020H1 increased 8.8% to $293 million, of which main business revenue increased 7.6% to $245 million; adjusted net profit increased 16.9% to $180 million (adjusted exchange loss of $11.23 million and share payment expenses of $16.33 million), and net profit of the mother increased 0.2% to $153 million. The gross margin of 2020H1 company increased 6.8 pCTs to 71.0%, mainly due to a decrease in main business costs during the pandemic; the sales expense ratio decreased by 0.6 pcts to 1.0%, and the management expenses ratio increased by 11.7 pCTs to 25.5%, mainly due to exchange losses, share payments, increased depreciation and amortization expenses, and increased remuneration due to the employment of personnel. In summary, the company's return/adjusted net interest rate increased by -4.6/5.9 pcts to 62.4%/73.6% during the reporting period.
The number of full-time students enrolled also increased by 6.4%, and the increase in tuition is expected to drive subsequent growth. As of 2020H1, the number of full-time students enrolled in the company's four schools increased by 6.4% to 39,879; the number of students enrolled in continuing education dropped by 43.9% to 4,044, mainly due to the impact of the pandemic on offline registration and student enrollment. The company's enrollment growth for the 2020-2021 academic year was impressive. The overall enrollment plans of its schools increased by more than 290% year-on-year, with an increase of more than 1,500 students. Looking at schools, the number of undergraduate students at Xinhua University increased by 19% to 6,400, of which 450% increased to 1,100; the number of undergraduate students at Hongshan University also increased by 34.2% to 3,259, of which 830 were promoted for the first time. The increase in tuition is expected to drive the company's subsequent endogenous growth.
Campus construction expands capacity and lays the foundation for medium- to long-term endogenous growth. The company's school campus expansion project is worth paying attention to: (1) Xinhua University: It is expected to open 4 new student dormitories and 1 experimental building in September 2020, with an estimated capacity increase of more than 4,000 people; (2) School of Clinical Medicine: The main building of the first phase of the Hefei New Campus project has been closed. It is expected to be put into use by September 1, 2021, and the conversion work is expected to be completed in 2021; (3) Hongshan University: Construction of the new campus began in May 2020, with a planned capacity of 25,000 people, of which the first phase of the project is scheduled to be put into use by September 2021 It is expected to accommodate at least 10,000 students. Campus expansion is expected to support the company's medium- to long-term endogenous growth.
The level of operation of schools continues to improve to meet the diverse needs of students. The company continues to optimize the quality of running schools. Xinhua University opened up second-degree enrollment and added 200 second-degree places. The School of Clinical Medicine was approved for new majors in medical laboratory technology, optometry, and health and service management, and new students were enrolled in Jiangsu and Sichuan provinces.
In addition, the Group has set up a special division to actively expand educational support services to provide students with a full range of services such as professional qualification examinations and internship training to meet the diverse needs of students.
Investment advice. As a high-quality brand for private colleges and universities in Anhui Province, the quality of running schools continues to improve, endogenous growth has been steady, and the integration of acquired schools is progressing smoothly. It is expected that the future will further expand its territory with the support of its own school brand. Based on the performance of the 2020 Mid-Year Report and the increase in student quota, we raised the net profit forecast for the year 2020 to $3.40/4.12/453 million (originally $318/388/436 million), an increase of 25.7%/21.0%/10.0%, corresponding to EPS 0.21/0.26/0.28 yuan, and the current price corresponds to PE 10X/9X/8X to maintain the “buy” rating.
Risk warning: There is a risk of policy uncertainty in the final draft of the “Regulations on the Implementation of the Promotion of the People's Promotion Law”; the expansion of special capital upgrades falls short of expectations; the pace of expansion falls short of expectations.