NEW HIGHER EDU (02001) reported its FY25 annual results, with revenue reaching RMB2.6 billion, up 7.8% year-on-year. Adjusted net profit stood at RMB812 million, a 5.2% increase, meeting expectations. Shenwan Hongyuan has raised its FY26-FY27 profit forecasts to RMB880 million and RMB1 billion (previously RMB800 million and RMB830 million) and introduced an FY28 profit estimate of RMB1.14 billion. The target price has been lifted to HK$3.38 (from HK$2.99), with a "Buy" rating maintained.

Key insights from Shenwan Hongyuan include:

**1. Commitment to High-Quality Education, Optimized Student Structure** FY25 enrollment totaled 139,000 students, a slight 0.6% decline from FY24. However, student composition improved, with undergraduate freshmen rising by 4 percentage points and total undergraduates increasing by 1 percentage point. Higher tuition fees for undergraduates drove average tuition up 8.1% to RMB16,700 per academic year. Enhanced campus facilities also led to a 5.2% rise in accommodation fees to RMB1,998 per year, contributing to the 7.8% revenue growth.

**2. Increased Investment in Education, Upgrading Standards** FY25 operating costs grew 9.2% to RMB1.68 billion, outpacing revenue growth by 1.4 percentage points. Staff costs surged 14.7% to RMB1.08 billion, with teacher salaries rising 14.7% to RMB720 million. Depreciation and amortization costs increased 10.8% to RMB260 million, reflecting investments in campus upgrades. Despite higher costs, gross margin narrowed slightly by 0.8 percentage points to 35.5%.

**3. Cost Peaking, Profitability Set to Rebound** The company’s "quality-first" strategy saw capital expenditure peak at RMB920 million in FY24 before moderating to RMB690 million in FY25. As schools pass teaching evaluations, normalized capital expenditure is expected to decline further, though fluctuations may occur due to the Hainan campus project. Operational efficiency is improving, with a student-to-teacher ratio of 19.1:1, nearing regulatory benchmarks. Shenwan Hongyuan anticipates gross margin expansion from FY26 onward as cost pressures ease.

**Risks:** Potential shortfalls in tuition fee hikes or delays in profit-oriented school conversions.