New equity issuance for expansions
On Oct 27, Yuhua announced new equity issuance of 220mn shares (6.5% dilution) at HKD4.19 per share (c.12% discount to Oct 26 close), raising HKD922mn gross proceeds for: 1) Given the non-profit policy requirement for K-9 compulsory education, Yuhua will convert its three K-9 schools to vocational colleges (c.RMB1.8-2.0bn CapEx need). The investment will also take consideration of future upgrade to vocational universities (职业大学). Overall plan is pending approval by provincial government; 2) New campus expansion for its Hunan International Economics University (c.RMB1bn CapEx need). Yuhua is currently searching for location, and targets to conclude by early next year; 3) Yuhua also plans to upgrade some of its vocational programs provided by its three universities to vocational bachelor programs (c.RMB0.6bn CapEx).
Share price drop partly due to murky financing urgency
The three initiatives above total about RMB3.6bn. Per Mgmt., Yuhua currently has c.RMB2.5bn cash on hand, of which c.RMB1bn should be set aside for operating needs (i.e. roughly similar to FY22E annual COGS + operating expenses), leaving c.RMB1.5bn for expansion investment. Mgmt. highlighted challenges of bank financing, therefore has decided to turn to equity financing. Yuhua’s share price dropped 20% on Oct 27, we believe it’s partly due to murky financing urgency given the perceived investment cash outflows are not immediate, and its share price has only enjoyed very brief recovery from historical low.
Pursuing policy drivers, displacing growth and M&A potential
We believe the investment plan for internal expansion and upgrade potentially limit Yuhua’s balance sheet capacity for M&A, which is a key earnings driver and valuation catalyst for the sector. We revised down FY22/23E core net profit 1%/4%, and lowered TP to HKD4.3 from HKD6.7, based on 10x next 12-mo P/E (lowered from 14x previously, refer to 1x PEG). Our TP implies 9.2x/8.6x FY22/23E P/E.