China YuHua Education Earnings: Disappointing Capex and Margin Slide; Risk of Dilution Remains High

China YuHua Education’s fiscal first-half 2024 results are disappointing. Capital expenditure remained high at 1.4 times of its interim revenue, and gross margin fell by 12.5 percentage points to 34.4% because of higher depreciation and staff costs. After adjusting our margin and capex assumptions, we cut our fair value estimate to HKD 0.80 per share from HKD 1.50. YuHua’s shares fell 4% ahead of the result release, and we think further negative reaction may persist in the near term. We see risk to our fair value estimate from possible dilution as YuHua extends its convertible-bond repayment.