China YuHua Earnings: Reducing Fair Value Estimate on Disappointing Revenue and Margin Trend

We have lowered our fair value estimate for YuHua to HKD 2.06 from HKD 2.42 based on the disappointing first-half (ending February 2023) results. Revenue declined by 1.2% year on year due to lower student enrolment in its high schools. The sharp contraction in gross margin to 46.9% from 56.6% and 67.2% in the first half of fiscal 2022 and 2021, respectively, is more concerning, as the company continues to invest heavily in its campuses and teachers. As a result, the revenue and margin trends are significantly underperforming higher education peers we cover. We lower our revenue forecast to CNY 2.4 billion from CNY 2.5 billion and our net income forecast to CNY 1.1 billion from CNY 1.4 billion in fiscal 2023. We also lowered our revenue and margin forecasts through fiscal 2027, resulting in a net income CAGR of negative 4.3% from fiscal 2022 to 2027, down from our prior negative 0.1% forecast. The shares closed 47% below our fair value estimate on May 2, but we suggest investors stay on the sideline until positive catalysts emerge.