Weak short-term growth
? Huali University changed its company name to China Vocational Education (CVE) and
reported 1H FY8/22 revenue of Rmb459m, up 3.2% yoy, and adjusted net profit of
Rmb142m, down 9.2% yoy, below our expectations because of slower top-line growth.
? Huali Vocational College recorded an 80% yoy increase in student admissions for the
Spring season, with about 3,500 students.
? During Huali College’s two-year observation period after its conversion, its student
enrollment is expected to remain stable.
? Reiterate Hold with new DCF-based TP of HK$1.01.
Results below expectations because of weak 21/22 new intake
China Vocational Education (CVE) reported 1H FY8/22 revenue of Rmb459m, up 3.2%
yoy, driven by 4.1% and 9.8% yoy revenue growth for Huali College and Huali Technician
College, respectively, supported by an average tuition increase of 4.4% yoy for Huali
College and an enrollment increase of 16.3% yoy for Huali Technician College. The
revenue growth was offset by a 1.5% yoy revenue decrease for Huali Vocational College
because the weak new student intake for the 21/22 school year resulted in a 6.8% yoy
enrollment decrease in Huali Vocational College. Its 1H FY8/22 gross margin was up by
0.6% pts yoy to 54.4%. The selling expenses ratio was down by 2.4% pts yoy to 2.1%, but
the administrative expenses ratio was up by 2.0% pts yoy to 12.5%, as CVE changed its
marketing strategy to reduce marketing expenses and raised the compensation for its
administrative staff. Its 1H FY8/22 adjusted net profit was Rmb142m, down 9.2% yoy,
below our expectation because of slower top-line growth.
Ample capacity but short-term enrolment expected to remain stable
The construction of phase I of Huali Technician College’s Jiangmen Campus was
completed, and the college is waiting for the acceptance inspection by the authority. The
campus is expected to open in Sep 2022, adding capacity of 6,000 students to Huali
Technician College. CVE plans to utilize some of its new capacity to develop new business,
such as vocational certificate exam preparation. The linkage between Huali Technician
College and Huali Vocational College will be a major focus for CVE. Directly upgrading
students from Huali Technician College to Huali Vocational College will help secure student
resources. Given this direct upgrading mechanism, Huali Vocational College recorded an
80% yoy increase in student admissions for the spring season, with about 3,500 students,
ranking third in Guangdong. However, during Huali College’s two-year observation period
after its conversion from independent college to private university, its student enrollment is
expected to remain stable.
For-profit conversion waiting for local authority’s initiation
Guangdong Province has not yet started the for-profit business model conversion for higher
education institutions. CVE will apply for conversion once the local authority initiates the
process. Schools that choose the for-profit business model will have more flexibility in
raising tuition, school expansion, etc. Approving for-profit conversions is also an indicator
that the government supports higher vocational education. CVE owns all the land on which
its schools are located, so it won’t need to repay the tax for its land during the conversion
process.
Reiterate Hold with a new DCF-based TP of HK$1.01
We cut our earnings forecasts for FY8/22–24F by 10.0%, 11.9% and 13.9%, respectively,
to reflect the mild new student intake increase. The key catalyst is the for-profit conversion
and upgrade from junior college to undergraduate college for Huali Vocational College.
The key risks are a delay in capacity expansion and negative policies