China New Higher Education Earnings: Steady Growth, Higher Dividend; FVE Stays at HKD 5.30

China New Higher Education 02001 further raised its interim dividend following a decent fiscal first half (ending February 2023) that recorded steady revenue and earnings growth of 9.2% and 13.1%, respectively. The proposed interim dividend translates to a 47.6% payout ratio. We keep our full-year 50% payout ratio forecast, leading to a projected 9.5% dividend yield at the current price level. We believe the generous dividend can be maintained, given CNHE’s steady performance and improving balance sheet. We increase our fiscal 2023 earnings estimate slightly to CNY 715 million from CNY 708 million. Our fair value estimate remains HKD 5.30, with 94% upside from its current share price.

Three out of the eight schools under CNHE have received preliminary approval of for-profit classification. We believe a final approval will boost investor confidence and drive the share price up. Its Guizhou school has been endorsed by the local government for an upgrade to undergraduate level from junior college level and is being reviewed by China’s Ministry of Education.

As part of its strategy to offer high-quality education, CNHE continued to invest in teaching staff and campus facilities. Teaching staff and depreciation and amortization expenses increased by 19.4% and 13.6% year on year, respectively. This resulted in the gross margin declining by 91 basis points to 39.3%, compared with the fiscal first half of 2022. Nonetheless, the investments made it possible for CNHE to generate higher revenue per student. We estimate average tuition and boarding fees increased by more than 10% and 20% year on year, respectively. This is much higher than peers under our coverage.

CNHE continued to improve its financial position. Its interest-bearing debt ratio declined to 31.6% as of February 2023, from 36.7% as of August 2022. The average interest rate of new borrowings declined by 31 basis points from the 2022 level, reaching a historical low.