Revenue in the first half of 2021 is in line with expectations

China Oriental Education announced its results for the first half of 2021: revenue of 2 billion yuan, up 32% from the same period last year, and adjusted net profit of 300 million yuan, up 42% from the same period last year. The growth is mainly due to the weak performance of offline teaching due to the impact of the epidemic in the first half of 2020; in the first half of 2021, the company resumed normal enrollment and teaching under the control of the epidemic, and the performance rebounded.

Development trend

The number of new students in the first half of the year maintained a growth rate, and the epidemic repeatedly or dragged down the annual income. The number of new enrollment increased by 35% in the first half of 2021 compared with the same period last year. The growth power mainly comes from: 1) the automobile sector has entered the power period: the number of new enrollment of Wantong Automobile has increased by 70% in the first half of 2021 compared with the same period in 2019, which is 37% higher than that in the same period in 2019. The new colleges and universities representing the automobile sector have entered a profit contribution period after a 2-3 climbing period. At the same time, the group has set up new incremental majors such as track service and electrician, and the enrollment feedback is good. 2) the growth of young sectors such as Omickey is strong: in the first half of 2021, the revenue of Omickey and delicious College increased by 82% and 94% respectively compared with the same period last year. We believe that the company's ability to open new business has been certified. However, considering that epidemic prevention and control measures in Henan, Jiangsu and other regions have led to the suspension of some campuses of the company in the middle of this year, or affected the growth rate of enrollment in autumn, we expect a year-on-year growth rate of about 18% in 2021, an increase of about 10% over 2019.

Professional and channel expansion leads to short-term profit margins or pressure. In the first half of 2021, the gross profit margin decreased by 2 percentage points compared with the same period last year, and the cost was relatively rigid due to relatively weak enrollment growth; in the first half of 2021, the adjusted net profit rate was 15%, of which sales expenses increased by 26% compared with the same period last year. This is mainly due to the company's plan to pilot offline channel enrollment, while the creation of new incremental specialties has increased brand placement. We expect the adjusted net profit for the whole year of 2021 to be about 820 million yuan, an increase of 63% over the same period last year, and the adjusted profit margin is expected to reach 19%.

Deepening vertically and horizontally, strengthening long-term layout: in the face of the changes in the accelerated development of the vocational education market, the management said that it will actively respond from both vertical and horizontal directions: 1) setting up majors in horizontal diversification: relying on the three major plates to continue to develop new incremental specialties, at present, hotel management, intelligent Internet of things and other related industry chain specialties have been launched in the cooking and computer sectors. 2) Longitudinal training of senior skilled personnel: to cater to the country's trend of deepening the reform of vocational education, the management said that it would seize the opportunity of employment skills training for secondary vocational school graduates and open up the upward channel of vocational education and college entrance examination in schools within the group. strengthen the training of advanced applied talents.

Profit forecast and valuation

Considering that the epidemic may repeatedly affect the company's enrollment and income growth, we will reduce the income by 10% and 9% in 2021 and 2022 respectively, and the adjusted net profit by 21% and 17% in 2021 and 2022, respectively. The company still has a leading position in vocational education, and we maintain an outperform industry rating, but due to low market sentiment and lower earnings forecasts, we have lowered our target price by 30% to HK $14, corresponding to 15 times the adjusted EV/EBITDA in 2021, which is 68 per cent higher than the current share price. The current share price corresponds to 10 times the 2021 EV/EBITDA.

Risk

The competition intensified; the impact of the epidemic persisted; the number of enrollment was less than expected.