1H22 revenue up 32% yoy, net profit up 17%, overall inline
Maintaining high cash dividend payout, with improving balance sheet
Robust results an important step to rebuild confidence amid trough valuations, 4.5x FY22E P/E, 10.2% div yield, reiterate BUY
　　Encouraging 1H22 results
　　1H22 revenue up 32% yoy, with tuition revenue up 32% yoy and boarding revenue up 29% yoy. Other income from Group's diversification also delivered 25% yoy growth, of which ToB services and tutoring were up 34% yoy and 35% yoy respectively. Due to policy mandate to boost education quality, New Higher’s operating cost increased significantly (i.e. teaching-related cost +71.5% yoy and teaching staff cost +31.5% yoy), as a result GPM declined to 40.2% (vs 45.4% in 1H21), GP +17% yoy, with continued expense control discipline, overall driving net profit +17% yoy. Balance sheet continues to improve with net debt to equity decreased 6.6ppt yoy to 50% as of Feb 2022 (vs. 57% as of Aug 2021). New Higher declared an interim cash dividend per share of RMB0.106 with payout ratio at 49%, maintained at raised level from FY21, and implies annualized dividend yield of 10.8%.
　　Quality is the key to sustainability
　　Despite weaker GPM in short term, New Higher's focus on quality is a long term positive from the perspective of competitiveness, future tuition hike potential, government recognition, and benefit for students, in our view. Mgmt. demonstrated elevated investments of c.RMB256mn in teaching facilities and equipment, building improvements, and cooperation with c.1,754 corporates to actively respond to government initiatives for vocational education.
　　Attractive valuation, a defensive play
　　Education policy shocks have led to significant de-rating in the higher education sector. We expect steady earnings delivery for next few years as New Higher will focus on organic growth, which is the key for rebuilding investor confidence. In this new normal, we believe New Higher’s valuation is attractive at 4.5x FY22E P/E with 10.2% cash dividend yield. We revised our FY22/23E core NP forecast -16%/-18%, mainly due to higher cost/expenses and tax rate assumption. We lowered TP to HKD4.3 from HKD6.9, based on 8x next 12-mo P/E (lowered from 11x previously). Our TP implies 8.8x/7.6x FY22/23E forward P/E, and 5.7% FY22E div yield. Key risks: 1) Enrollment/Tuition increase; 2) Costs related to “for-profit” registration; 3) Regulations.