Edvantage Earnings: Decent Enrolment Growth; Stable Gross Margin; Return to Cash Dividend a Positive

Edvantage 00382 delivered a decent fiscal first half (ending February 2023) with revenue and net income up 18.3% and 18.9% year on year, respectively. Student enrollment increased 12.2% to 85,603, exceeding its 83,000 target. We increase our fiscal 2023 earnings estimate slightly to CNY 652 million from CNY 627 million, but our fair value estimate remains HKD 6.10. The shares are attractive, and we think investors may warm to the return to a cash dividend following a script dividend last November that disappointed the market. Edvantage is trading on a projected 7% dividend yield.

Edvantage increased interim cash dividend per share by 7.1%, keeping the payout ratio at 30%. We think this should help ease concerns about its financial condition. Edvantage has CNY 913.2 million cash and equivalents as of February 2023, almost the same as in February 2022. The interest-bearing debt ratio declined to 23% from 25%. Edvantage does not have M&A plans in the near term. We think the capital expenditures related to its schools can be funded by operating cash flow and debt financing, if necessary. As such, we think dilution risk is low.

The gross margin improved by 36 basis points year on year despite a 12.4% increase in staff and depreciation expenses. This is better than peer China New Higher Education that recorded a 91-basis-point year-on-year gross margin decline. The margin expansion was helped by 12.2% student enrolment growth and a 5.2% increase in revenue per student. We forecast 50.6% gross margin in fiscal 2023, but we expect gross margin to gradually decline to 49.2% by fiscal 2027. We think cost per student will increase faster than revenue per student as Edvantage continues investing in high-quality education.