Hope Education reported FY21 revenue of Rmb2.32bn (+48.2% YoY), and adjusted net profit of Rmb866m (+50.5% YoY). The revenue result was in line with our expectation, but the earnings result beats our expectation, backed by the improvement of the acquired school after great post-investment management as well as robust organic growth.
Solid enrolment growth. Driven by two-million enrolment expansion of junior colleges announced in 2020 Government Work Report and consolidation of newly acquired schools, Hope Education booked enrolments of 197k (+40.4% YoY) in FY21. Of which, enrolments of 4-year bachelor program reached 98.8k (+38.6% YoY) and those of 3- year junior college program was 80.2k (+32.3% YoY). Besides, six independent colleges, ran by Hope Education, decreased enrolment quotas of 4-year bachelor programs by 8k for SY21/22 to meet the requirement of spin-offs. Therefore, we believe that the rising new enrolments and total enrolments are backed by the outstanding recruitment of junior colleges. According to company, it booked total enrolments of 232k, up by 19.2% YoY or 13% YoY without newly merged schools. And we estimate that the new enrolments of junior colleges for Hope Education to increase by 26% YoY, reaching c.58,681 in SY21/22. In addition, since six independent colleges have been or will complete the spin- offs in 2022, we expect the enrolment quotas of 4-year bachelor programs will recover for SY22/23E. And we forecast the total enrolments to rise to 292k in FY24E, leading to a revenue of Rmb4.12bn with a three-year Cagr of 21%.
Margin expansion. Hope Education booked gross margin of 53.2% (+0.8ppts YoY) and adjusted net margin of 37.3% (+0.6ppts YoY) in FY21. We believe rising margins was due to the strong operating leverage of higher education business. As enrolments increased, fixed cost will get diluted. The company also booked rising sales expense of Rmb147m in FY21, accounting for 6.3% (+2.4ppts YoY) of revenue, due to the active recruitments under the enrolments expansion policy for junior colleges. Backed by acquisitions of Gongqing College of Nanchang University etc., Hope Education achieved G&A expenses of Rmb333m (+1.8ppts YoY) in FY21. Besides, thanks to a reversal of impairment loss of Yinchuan Energy Institute, the company also booked reverse of impairment loss of Rmb180m in FY21. Along with fair value gains of Rmb212m from remeasurement of equity value of Qiannan Institute of Technology, other income reached Rmb667m in FY21. Due to the spin-offs of independent colleges, Hope Education also paid break-up fee of Rmb755m in FY21 (Qiannan Economic College break-up fee: Rmb412m; Qiannan Economic College termination of brand usage fees: Rmb77m; Qiannan Institute of Technology break-up fee: Rmb265m). With the adjustments of such non-operating income and expenses, the company achieved adjusted net profit of Rmb866m. We expect that expenses will fall with the continuous post-investment management. We thereby estimate that adjusted net profit of Hope Education will reach Rmb1.67bn in FY24E, representing a three-year Cagr of 24%.
Potential upgrades to vocational universities. “Opinions on Supporting the Development of Modern Vocational Education” issued on 12 October, strongly supported vocational education, stated that “By 2025, new enrolments of vocational undergraduate education will be no less than 10% of total new enrolment of higher vocational education”. We estimate that the new enrolments of vocational universities will reach 648k in 2025E, far more than the enrolment quotas of 61k of 37 existing vocational universities. Therefore, we believe that high-quality junior colleges may get chance to upgrade to satisfy the enrolment target set by the policy. Sichuan Tianyi College, which ran by Hope Education, has met the standard for upgrade. We thereby anticipate the upgrade process of Tianyi College will reboot. In addition, newly established Chongqing Digital Industry Vocational and Technical College and Jiangxi Zhangshu Vocational College of Traditional Chinese Medicine have been included in provincial (municipal) 14th Five-Year Plan for the establishment of colleges. Once such upgrades get approved, it is expected to benefit enrolments and drive a substantial increase in tuition fees.
Maintain BUY. With the completion of spin-offs for independent colleges, we expect that the enrolments of undergraduate will recover for Hope Education. Post-merger management will also go on and drive margins up. Therefore, we raise our adjusted net profit forecast to c.Rmb1.02bn and c.Rmb1.34bn for FY22E and FY23E. And we estimate that the adjusted net profit of Hope Education will be c.Rmb1.67bn in FY24E. We thereby deliver EPS forecast to Rmb0.13, Rmb0.17 and Rmb0.21 for FY22E, FY23E and FY24E. We raise our target price to HK$4.08 and maintain BUY rating.
Risks: Recovery of undergraduate enrolments is less than expected.