Summary. During the post-results NDR, investors’ main focus was on growth outlook, timetable for financial consolidation of acquisitions made and M&A. We think the stock’s valuation is attractive given that it trades below its historical average P/E and sector average’s PEG.
- Dianchi College led the growth in 1H19. The Company’s adjusted net profit rose 42% YoY to RMB233mn. The college, which was financially consolidated in Aug 2018, contributed around RMB60-70mn net profit in 1H19, contributing most of the increase of the company’s adjusted net profit. For 2019/20 school year, its admission quota jumped 11% to 7,890. We think it remains a major growth driver of the Company.
- Nanchang College a new growth driver. The college completed the upgrade to university in 1H19 and can offer undergraduate programs in Sep 2019. Total admission quota is jumped from 4,800 (junior college) to 8,000 (2,000 undergraduate + 6,000 junior college). While tuition fee of undergraduate is set at RMB18,000 - 22,000, the tuition fee of junior college is raised from RMB7,300-8,000 in 2018-19 school year to RMB9,500-12,000 in 2019-20 school year. Management expects this college can post 20-30% revenue CAGR in coming 2-3 years.
- Timetable for financial consolidation of two acquisitions made uncertain. Though the timetable for change of sponsor of Nanchang College is uncertain, the Company targets to complete entrusted management arrangement by end of 2019 and then book the college’s net profit as management fee income. For Anhui Wonder University, the acquisition is going through the stage of debt restructuring of its sponsor with stage of sponsor change coming next.
- M&A. The Company is looking for one acquisition in 2H19 with preference on self-run university or vocational college which meets conditions for upgrade to university. The Company had RMB753mn cash on hand as at 30 Jun 2019. With around RMB1bn tuition and boarding fees coming in Sep and RMB10bn credit line from ICBC, we think the Company has sufficient cash to make acquisition.
- Valuation. According to Bloomberg estimates, the stock trades at 12.3x FY19E P/E, which is below its historical average of 14.6x. Its 0.65x PEG (at 19% EPS CAGR in FY20-21E) is lower than sector average of 0.73x.EPS. Catalysts: (1) policy overhang removed; (2) M&A; (3) complete entrusted management arrangement of Nanchang College.
