Yuhua’s FY21 revenue reached RMB2.6bn, +30% yoy, adj. NP reached RMB1.4bn, in-line
Yuhua announced to cut dividends to zero, a negative, in our view
Lack of catalyst and dividend cut warrants our downgrade to NEUTRAL; TP cut to HKD3.6
Separation of K-9 business
As a result of policy prohibiting K-9 compulsory education to be for-profit and related-party transactions, Yuhua has written down its investment in K- 9 business. The company has a total of 18 K-9 schools, of which three are in process to be converted into vocational colleges (高职). Over the long term, Yuhua plans to convert the remaining K-9 schools to vocational colleges or secondary vocational schools ( 中 职 ), depending on the requirements and licenses approval.
FY21 inline, non K-9 revenue growth slowed
Due to the above, Yuhua has started to present financials excluding K-9 business, which experienced revenue growth of +11% yoy, and adj. NP +44% yoy in FY21. GPM was exceptional at 67.2% vs 61.7% in FY20 Pro- forma, driving core net margin 55.7% up substantially vs 43.1% in FY20 Pro-forma. Yuhua also announced that it will not pay-out cash dividend for at least two years, conserving for investments. We think the dividend cut is negative due to divergence from peers’ policy as well as market expectation given the stable cash flow nature of the business. Moreover, some market participants have been disappointed by a lack of M&A since company’s last acquisition in 2019 (Shandong Yingcai University), plus recent equity issuance in Oct.
Downgrade to NEUTRAL; TP down to HKD3.6
We are downgrading Yuhua from BUY to NEUTRAL from a lack of clear earnings drivers and catalysts, also considering recent equity issuance and dividend cut. We would turn more positive when Yuhua can deliver concrete execution in terms of M&A or meaningful expansions, leading to higher growth expectations. We lowered our TP to HKD3.6 from HKD4.3, based on 8x next 12-mo P/E (lowered from 10x previously, refer to -2SD of historical mean). Our TP implies 8.2x/7.4x FY22/23E forward P/E.