FY21 results in line with market consensus
　　Hope Education has announced its FY21 results (as of the end of August 31, 2021): Revenue grew 48.2% YoY to Rmb2.32bn; adjusted gross profit was Rmb1.24bn, with adjusted gross profit margin rising 0.8ppt YoY to 53.2%; adjusted net profit attributable to shareholders came in at Rmb869mn, with adjusted attributable net profit margin at 37.4%, largely in line with management guidance and our forecast.
　　Trends to watch
　　FY21 revenue rose 48% YoY to Rmb2.32bn. The organic revenue growth of existing schools stood at 21%, with their student enrollment increasing 30% YoY. 1) In FY21, the firm acquired several schools (INTI International University, Gongqing College of Nanchang University, Jinken College of Technology, Pioneer College of Inner Mongolia University, and Shinawatra University in Thailand), which we believe should drive the organic growth of the company in the long term. 2) In terms of self-built schools, two of Hope Education’s higher vocational colleges, namely Baiyin Hope Vocational and Technical College and Xingtai Vocational College of Applied Technology, started enrolling students in September 2021. The total enrollment of the two schools exceeded 3,000, beating the firm’s expectation. 3) Among the firm's six independent colleges, Science & Technology College and Business College in Guizhou have successfully transformed themselves into private universities, with freshman registration rate improving to 98% and 97% in 2021. We expect the conversion of independent colleges into private universities to boost the growth of student enrollment and tuition fees. The company announced that it had 232,059 students in total as of November 1, 2021, increasing 19.3% YoY.According to the management, tuition fees increased by about 5% on average in FY21. Given the expected growth of student enrollment and tuition fees, we expect FY22 revenue to grow 24.6% YoY to Rmb2.9bn
Adjusted gross profit (excluding depreciation and amortization of school assets due to fair value changes) was Rmb1.24bn in FY21, with gross profit margin rising 0.8ppt YoY to 53.2%; adjusted attributable net profit stood at Rmb869mn, and adjusted attributable net profit margin grew 0.7ppt YoY to 37.4%. According to the management, profit margin of newly acquired schools has the potential to rise in the long term from the currently low levels. We expect the company’s blended profit margin to decline in the short term as newly acquired schools are consolidated into its financial statements. In addition, we expect increased student enrolment expenses during the early stage of integrating newly acquired schools. We thus expect FY22 adjusted attributable net profit to reach Rmb966mn with adjusted profit margin at 33%.
　　Financials and valuation
　　Considering the financial consolidation of newly acquired schools and the commissioning of self-built schools, we raise our FY22 revenue forecast 14% to Rmb2.9bn. Given increased expenses for consolidating newly acquired schools, we largely maintain our adjusted net profit forecast. We introduce our FY23 revenue and adjusted attributable net profit forecast of Rmb3.2bn and Rmb1.14bn. We maintain an OUTPERFORM rating, but cut our TP 31% to HK$2.50 (10x FY22e EV/EBITDA with 46.2% upside) on weak valuation recovery amid policy changes. The stock is trading at 7.0x FY22e EV/EBITDA.
　　Risks
　　Uncertainties in M&A-driven growth outlook; disappointing growth in student enrollment and tuition fees.