New Higher Education (NHE) reported FY22 revenue of Rmb1.92bn (+28% YoY) and adjusted net profit to shareholder of Rmb661m (+16.4% YoY). Growth in both topline and bottom line came in line. We believe that growth in revenue was driven by rising tuition and boarding fees and consolidation of newly merged schools (Lanzhou school and Zhengzhou school). And increasing earnings was due to the acquisition of minority interest of Leilongjiang school. Within the revenue growth, organic growth reached 16%, and rest was from M&As. NHE also announced to pay dividend of Rmb0.093, leading to a dividend of Rmb0.199 in total in FY22. Payout ratio was 50% and dividend yield reached 8.4%.
　　Driven by organic growth and M&As. In SY21/22, enrolments of NHE rose by 22% to 144k due to the three-million enrolments expansion of junior colleges in three consecutive years. Thanks to high-quality strategy, average employment rate of graduates exceeded 98% for the firm and strong reputation was built, resulting in a 5% YoY growth in average tuition. Besides, Lanzhou school and Zhengzhou school were consolidated in April and September in 2021, thereby making contributions to revenue in FY22. Due to enrolments optimization, total enrolments were down by 2.3% YoY to 141k in SY22/23. But undergraduate enrolments exceeded 51k, accounting for 36% (+6pcts YoY) of total. As average tuition of undergraduate students is much higher than that of junior college students, we forecast average tuition will grow by 11% YoY in FY23E, leading to a revenue of Rmb2.09bn (+8.6% YoY).
　　Margins curbed, but will rebound with growing training business. NHE booked gross margin of 39% (-5.6pcts YoY) in FY22, while net margin attribute to shareholder was 34.4% (-3.5pcts YoY and +1.1pcts HoH). Declining margins was due to growing COGS (+41% YoY) amid on-going high-quality strategy, which increased investment in teachers and hardware in schools. Owing to enhancement in new media marketing, sales expenses rose by 42% YoY to Rmb28.7m. Thanks to central management model, G&A expenses accounted for 4.6% of revenue (-1pcts YoY). Of note, the company expanded its business into vocational training services, achieving revenue of Rmb142m (+22% YoY) in FY22. We anticipate that vocational training services will become main driver, and we expect the other gain of NHE to rise to Rmb383m/458m/548m in FY23E/24E/25E. Looking forward, we believe that growth in COGS may decline and vocational training services will boom. Margins will recover as construction gets completed and investment in hardware drops.
　　Maintain BUY. Thanks to high-quality strategy, we forecast average tuition will grow at a Cagr of 6.4% from FY22 to FY25E. Net margin will also expand slightly in the future due to the development of vocational training services, reaching 42% in FY25E. But as growth of enrolments slowdown, we lower our adjusted net profit to shareholder forecast to Rmb781m and Rmb915m in FY23E and FY24E. We also forecast adjusted net profit to shareholder to reach Rmb1.04bn in FY25E. We lower our target price to HK$3.09. With 31% upside, we maintain BUY.
　　Risks: Development of vocational training business is not as expected; raise in tuition is less than expected.