China East Education Holdings Ltd 00667

China East Education Earnings: Margin Contraction Is Disappointing; Fair Value Estimate Cut

China East Education's 2023 earnings missed our expectations due to margin contraction, although revenue was in line, which we attribute to increasing challenges in student recruitment amid rising competition. Based on the disappointing results, we adjust our student enrollment and margin forecasts and cut our net income estimates by 17%-21% for 2024 through 2027, reducing our fair value estimate by 12% to HKD 5.36. Despite the cut, we think it is time to buy narrow-moat China East, as we believe its earnings have bottomed out and expect margin to recover in the coming years. We now project CNY 422 million net income in 2024, up 55% year on year. In addition, the proposed dividend translates to an 8.3% dividend yield based on the March 28 share price, and management intends to keep the dividend amount stable. We think the dividend provide downside protection while the anticipated earnings rebound offers upside potential.