Continued spending on teaching quality
? CNHE reported 1H FY8/22 revenue of Rmb1,036m, up 31.7% yoy, and net profit of
Rmb345m, up 17.2% yoy, in line with our expectations. The interim dividend payout
ratio for the period improved from 30% last year to 50%.
? In the next few years, CNHE will continue to focus on high-quality organic growth
instead of high-speed enrolment growth and M&A.
? With the optimized student structure, we expect CNHE’s average tuition to grow by over
a 10% CAGR in the next three years.
? Reiterate Add with a new DCF-based TP of HK$4.9.
Results in line, high-quality organic growth to continue
CNHE reported a 32.0% yoy tuition revenue increase and a 28.9% yoy boarding revenue
increase in 1H FY8/22. Total student enrolment in the 21/22 school year was over 140k.
Because of a 71.5% increase in teaching costs and a 31.5% increase in teacher
compensation, its 1H FY8/22 gross margin dropped by 5.2% pts yoy to 40.2%. The ratio
of selling expenses to total revenue grew by 0.5% pts, as CNHE established a department
for brand building and stepped up its campaigns to improve brand value. The ratio of
administrative expenses to total revenue fell by 0.9% pts yoy. CNHE’s financing costs
dropped by 82 bps to below 5% during the period, as it actively replaced high-cost debt
with low-cost debt. The interim dividend payout ratio for the period improved from 30% last
year to 50%. In the next few years, CNHE will continue to focus on high-quality organic
growth instead of high-speed enrolment growth and M&A.
Optimizing the enrolment structure
Since CNHE will focus on high-quality organic growth, its enrollment growth is expected to
slow down and become more stable, but its student structure is expected to be optimized
to drive average tuition revenue. In the 21/22 school year, the percentage of CNHE’s
undergraduate students in its total enrolment improved by 5% pts yoy with a 20.2% yoy
increase in the number of new undergraduates, and its junior college to undergraduate
upgrading program (92.0% yoy growth for the junior college to undergraduate upgrading
program with about 4.5k new students). In its Yunnan School, the percentage of
undergraduate students was about 50%, and it is expected to increase in the next few
years. With the optimized student structure, we expect CNHE’s average tuition to grow by
over a 10% CAGR in the next three years.
Improving teaching quality and diversifying its revenue stream
In 1H FY8/22, CNHE invested heavily into improving teaching quality. Teaching costs rose
by 71.5% yoy, driven by a 33.6%, 120.2% and 225.3% yoy cost increase in student
activities and competitions, teaching optimization and school-enterprise cooperation, and
high-quality employment support, respectively. CNHE spent Rmb145m to upgrade
practical training facilities, laboratories and smart classrooms, and Rmb110m to upgrade
the campus and commercial area. In the next three years, CNHE will continue to invest in
improving teaching quality, which in our opinion, may continue to hurt margins, and it will
invest at least Rmb400m in upgrading its campuses and facilities. CNHE is also diversifying
its revenue stream with 38.3% yoy organic growth in revenue from other business, driven
by 33.9% yoy growth in commercial and supporting revenue and 35.0% yoy growth in
exam- preparation revenue.
Reiterate Add with a new DCF-based TP of HK$4.9
We cut our forecast for FY8/22–24F by 15.7%, 18.0% and 16.6%, respectively, to reflect
CNHE’s continued investment in teaching quality, which will put pressure on its gross
margin. Positive catalysts include bigger tuition fee increases and beneficial vocational
education policies. The risks include any negative government policies.