China YuHua Share Price Up on 2022 Results, Resumes Trading

China YuHua’s 06169 share price was up 18% on Feb. 28 after the company announced its delayed fiscal 2022 (ended August) results and resumed trading. This is expected given the 10%-50% share price gains by peers amid improving sentiments while YuHua’s shares were suspended for trading. We marginally increase our fair value estimate to HKD 2.42 from 2.32 after adjusting our model. While we think YuHua is undervalued, we believe YuHua will trade at a valuation discount to peers with share price performance capped in the near term due to the lack of investors’ confidence following its convertible bond default.

Currently, the convertible bond has a balance of HKD 974 million and will be due in December 2024. If the balance is fully converted to common shares, it will expand YuHua’s share base by 16.4% and reduce our fair value estimate by a single-digit percentage. The HKD 1.65 conversion price is 26% higher than its market close price on Feb. 28. We think this will further weigh on share price performance as investors are concerned with the potential significant dilutions.

Excluding the losses from K-9 school deconsolidation and the fair value gain of convertible bond in fiscal 2021, YuHua’s adjusted net income declined by 1.9% year on year in fiscal 2022 despite revenue increasing by 5.4%, in line with our expectation. This was attributable to higher investments in teachers and students to improve education quality, evidenced by the sharp decline in gross margin to 59.6% in fiscal 2022 from 67.2% in fiscal 2021. To factor in rising costs and declining gross margins, we forecast adjusted net income to decline at a 1.3% CAGR from 2022 to 2027 despite projecting revenue to grow at a 5.3% CAGR during the same period.