Yuhua Education reported FY21 revenue of Rmb2.26bn (+11% YoY) excluding the K9 school business which was classified as discontinued business. Adjusted revenue (include K9 school business) reached Rmb2.64bn (+10% YoY) and adjusted net profit attribute to shareholders was Rmb1.44bn (+38% YoY).The result was in line with our expectation. We believe rising earnings was due to the efficient cost control as well as the consolidation of minority interest of Hunan International Economics University and Shandong Yingcai College.
　　Eliminated K9 business as well as policy risks. As “Private Education Promotion Law (Implementation Plan)” set clear limitation on related party transactions for compulsory education schools, Yuhua Education decided to divest its K9 business in FY22 and classified its K9 business as discontinued business in the earnings result in FY21. Based on the assumption of divesting K9 business, revenue of the company declined by Rmb385m in FY21. Gross profit and adjusted net profit attribute to shareholders decreased by Rmb198m and Rmb134m. And revenue, gross profit, and adjusted net profit attribute to shareholders of high school and higher education business was Rmb2.26bn, Rmb1.52bn and Rmb1.3bn, respectively. Since the unmerging of K9 business incurred a one-time impairment loss of Rmb1.04bn, the expenses will be stripped off the statement along with the K9 business and will not be included in the adjusted net profit. Therefore, after deducting the impairment loss, Yuhua Education booked adjusted net profit of Rmb1.44bn in FY21.
　　Robust capacity expansion for organic growth. Revenue from non-K9 business reached Rmb2.26bn in FY21. And revenue of higher education business was Rmb2.02bn (+15% YoY) in FY21, accounting for 76.6% (+10ppts YoY) of total revenue. The expansion of higher education business revenue was mainly due to the increase in enrolments from 106k in FY20 by 7.1% YoY to 114k in FY21. Meanwhile, average tuition of higher education business also rose by 7.5% YoY to Rmb17.8k in FY21. And Yuhua Education also booked gross profit of Rmb1.52bn (+27.1% YoY) in FY21, expanding gross margin by 6.8ppts. The company continued to empower newly merged schools with management export and efficiently improved operations of those schools. Besides, revenue of high school business was declined by 13.4% YoY to Rmb230m in FY21, accounting for 8.9% (-1.4ppts YoY) of total revenue. And gross profit of such also decreased by 34.4% YoY to Rmb79.55m. In addition, the company will continue to focus on business transformation. It planned to transfer elementary school in Xingyang, elementary and middle schools in Jiaozuo and Luohe to three junior colleges. According to the plan, enrolments of each junior colleges will eventually reach c.12,000 when fully operates. We assume that the enrolment quotas will reach 5k, with a registration rate of 80%, for the fifth year of operation for each junior college. Thereby, we estimate the enrolments of each junior college may reach 11.8k. And we expect average tuition to further increase to c.Rmb16.7k for the fifth year of operation. Therefore, we estimate each junior college will achieve revenue of c.Rmb197m and net profit of c.Rmb63m for the fifth year of operation, representing net margin of 32%.
　　Maintain BUY. As K9 school business gets divested, and the improvement of higher education business operation efficiency is close to the extreme, we believe the earnings growth of non-K9 business of Yuhua Education will slowdown. Therefore, we lower our adjusted net profit attribute to shareholders forecast to Rmb1.36bn and Rmb1.45bn for FY22E and FY23E. And we estimate adjusted net profit attribute to shareholders forecast of Rmb1.62bn for FY24E. We also lower the EPS forecast to be Rmb0.38/Rmb0.40/Rmb0.46 for FY22E/FY23E/FY24E. We lower our target price to HK$4.57. With 23% upside, we maintain BUY rating.
　　Risks: Approval for junior colleges may fall short of expectation; Enrolment of new schools may less than expected.