The declining performance became the last straw to overwhelm the stock price of Guangzheng Education (06068).

On April 26, Guangzheng Education's financial report showed that for the six months ended February 29, 2024, the group's revenue was 796.63 million yuan, a year-on-year decrease of 29.7%; profit attributable to shareholders was 47,174 million yuan, a decrease of 14.2% over the previous year.

Compared to leading education companies whose performance exceeded expectations, Guangzheng Education's financial performance was indeed somewhat unsatisfactory. Investors also voted with their feet. The company's results later fell by more than 22%. As of the close of trading on April 29, it was HK$0.226, a decrease of 27.1%, and the turnover was HK$3,086,800.

The two major businesses have shrunk across the board

According to public information, Guangzheng Education was founded in June 2002. As a leader in private education in South China, Guangzheng Education has made great strides on the path of extended mergers and acquisitions, and the scale is impressive. However, with changes in industry policies, the company had to put a sharp brake on the brakes and divest all of its schools, including the high school business where the current policy is unrestricted. After the divestment of the affected entities, the remaining business was mainly engaged in school-related supply chain business and comprehensive education services.

In the six months ended February 29, 2024, school-related supply chain business revenue was 52.882 million yuan, down 15.1% year on year; accounting for 66.4% of total revenue, up 11.4 percentage points year on year; comprehensive education service revenue was 267.91 million yuan, down 47.5% year on year; accounting for about 33.6% of total revenue, down 11.4 percentage points year on year. The overall contraction of the two major businesses led to a decline in Guangzheng Education's revenue.

Looking at the long term, Guangzheng Education's revenue has been tepid since FY2021. From fiscal year 2022 to the middle of fiscal year 2024, the company's revenue was $116 million, $113 million and $80 million respectively, with a marked decline. At the same time as revenue continues to decline, Guangzheng Education's profit side has narrowed. From 2022 to mid-2024, the company's net profit to mother was 55 million yuan, 55 million yuan and 47 million yuan.

I still remember that after resolutely “breaking the end” at the time, Guangzheng Education drew three development paths of “survival.” The first is a comprehensive quality education service for students to provide students with quality education activities; the second is school-related supply chain business, which sells daily necessities such as school uniforms and school supplies; and the third is the division of the high school part into an independent school entity.

Looking at it now, the comprehensive quality education service and supply chain business for students continues to shrink, indicating that from ToC to ToB, first-line school management is shifting to the path of providing management for schools, and that Zheng Education alone is not going well. Some analysts pointed out, “At this stage, domestic schools often have stable partners for services such as catering and property management. If they want to break into the supply chain of existing schools, it is quite a challenge for Guangzheng Education, which has a small business scale, to open up the market.”

The key to the rise of independent high school and high schools is afraid that finances will be unsustainable

The supply chain and quality education business alone are too small, making it difficult to tell a good story in the capital market. Independent high schools are the only endorsement of the revival of Guangzheng Education.

According to public information, on August 30, 2023, Dongguan Ruixing Business Service Co., Ltd., a wholly-owned subsidiary of the company, signed a contract arrangement with Guangdong Guangzheng Education Group Co., Ltd. and Zhongshan Wenrui, so that it can obtain control of Zhongshan Wenrui. According to reports, Zhongshan Wenrui was founded in 2021 and plans to establish and operate a new high school in Zhongshan. According to the land agreement, Zhongshan Wenrui can also build a kindergarten. As of August 31, 2023, Zhongshan High School and Zhongshan Kindergarten have not yet been completed. If the high school is successfully completed and its performance is combined, Guangzheng Education may be able to usher in a second spring in the capital market.

However, independent high schools are an asset-heavy industry. If they want to enter the independent high school field, are they at odds with Guangzheng Education's expectations that “the future will operate according to an asset-light model”, and how can the asset-light model support the establishment and operation of schools? If there is no support for K12 schools to collect tuition fees in advance in the future, how should funds be allocated for the construction of independent high schools and vocational education businesses? Strong and abundant cash flow is clearly essential. However, high debt putting pressure on the cash side is a consistent problem of Guangzheng Education.

Once upon a time, when it came to investing in mergers and acquisitions, Guangzheng Education's strategy clearly fell into the category of aggressive. At the time of listing, the company raised a total of 730 million yuan, of which more than 90% of the capital was used to expand existing schools or expand new schools. Rapid expansion has led to rapid growth in the number of schools and the size of colleges, but it has also made it more difficult to move capital. From FY2019 to FY2021, the company's balance ratio fluctuated around 60%, which is a high level compared to other companies in the same industry. At the same time, bank loans also exceeded 2 billion yuan. High debt and high balance-to-debt ratios have always been a problem with Guangzheng Education.

After the divestment of the school, this issue was not solved. According to the latest financial report, Guangzheng Education's balance ratio is still as high as 60.21%, and the capital debt ratio is 52.6%, an increase of about 5 percentage points over the previous year, and debt repayment pressure has increased. As of February 29, 2024, the total amount that the company may have to pay as a financial guarantee to banks for bank financing granted to affected entities is still as high as 4.118 billion yuan.

In terms of cash, as of February 29, 2024, the company's cash and cash equivalents were approximately $130 million, down nearly half from FY2023 (a decrease of 112 million yuan). As can be seen, Guangzheng Education still relies on cash input from affected entities to a certain extent. Without affected entities, the company's cash situation is likely to deteriorate further. It is worth mentioning that as of February 29, 2024, the company's trade receivables, deposits, prepayments and other receivables were approximately 210 million yuan.

In summary, Guangzheng Education's main business is currently limited in scale, making it difficult to bear the costs required to explore new business directions. Combined with cash pressure, the transformation path of education alone is bound to be uneven.