1HFY22 results largely in line with our forecast
China New Higher Education Group announced results for 1HFY22 (ended February 28, 2022): Revenue rose 31.7% YoY to Rmb1.04bn and attributable net profit rose 17.2% YoY to Rmb345mn, largely in line with our expectations.
　　Trends to watch
　　Revenue grew steadily and investment in teaching and student employment increased. Revenue in 1HFY22 rose 31.7% YoY to Rmb1.04bn, of which revenue from tuition fees increased 32% YoY to Rmb944mn and that from accommodation fees grew 28.9% YoY to Rmb93mn. According to our calculations, excluding the impact of the consolidation of Gansu and Zhengzhou schools, the firm’s organic revenue growth was about 10%, mainly driven by the rise in tuition fees. Gross margin in 1HFY22 dropped 5.2ppt YoY to 40.2%, mainly due to the increase in teaching investment. The firm is attracting high-end personnel: The number of teachers with a master’s degree or above grew 21% YoY. It also raised the salaries of staff (up by 8% for core positions) and upgraded campus facilities (operating costs rose 44.2% YoY, outpacing revenue growth).
　　Effective expense control contributed to steady earnings growth. Sales expense ratio in 1HFY22 was largely flat YoY at 1.3%, as the firm enhanced school brand building. G&A expense ratio fell 0.9ppt YoY, while the ratio of other expenses to revenue rose 0.1ppt YoY to 3.5%, mainly due to the upgrading of the campus to improve students’ experience. The optimization of the funding and liability structure drove financing costs down to 5%. We believe the firm will effectively control the growth of expenses while increasing investment in teaching, so as to promote steady earnings growth.
　　Emphasis on the integration of industry and education and high-quality development lays the foundation for high-quality organic growth. The newly revised Vocational Education Law, which will take effect on May 1, 2022, makes clear that vocational education and general education are equally important, and encourages companies to be deeply involved in the integration of industry and education and cooperation between schools and enterprises. In 1HFY22, the firm cooperated with the Snow Laboratory of Harvard Graduate School of Education and Xi’an Jiaotong-Liverpool University to jointly build leading majors; it also cooperated with domestic and foreign companies such as Tencent, Tesla and China Mobile to build industrial colleges and open employment classes. The firm’s average employment rate for graduates reached 98% as of end-2021. We believe that the firm’s emphasis on joint major construction and school-enterprise cooperation will lay a solid foundation for sound organic growth in the future.
　　Financials and valuation
　　Considering the increase in teaching investment, we cut our FY22 and FY23 adjusted attributable net profit forecasts by 6.8% and 8.6% to Rmb648mn and Rmb746mn. With a 50% dividend payout ratio, the current share price corresponds to a dividend yield of 10%. Considering the increase in teaching investment is conducive to the long-term development of the higher vocational education business, we maintain an OUTPERFORM rating and TP of HK$3.2, which implies 6.6x FY22e and 5.7x FY23e P/E and offers 35.6% upside. The stock is trading at 4.9x FY22e and 4.2x FY23e P/E.
　　Risks
　　Disappointing growth in tuition fees; higher education policies more positive than expected.