1H19 adjusted net profit +12%, in line but margins below our expectation. That said, management expects the financials of Kunming schools could be consolidated in 4Q19. We estimate this would boost earnings growth to 53% YoY in FY20E. Maintain Buy.
- 1H19 results inline but margins below. Adjusted net profit rose 12% YoY to RMB154mn, representing 53% of our FY19E estimates (vs 54% in 1H18). Revenue climbed 14%, primarily driven by ASP growth. GPM narrowed by 0.9ppt to 64.3% due to employment of more teachers and enhanced teachers’ training. SG&A expenses ratio gained 0.8ppt to 15.5%, arising from increase of management expenses and expenses for requirement of listed company. The margin decline was offset by increase of interest income.
- Quota and tuition fee increased in 2019/20 school year. Admission quota of Xinhua University and School of Clinical Medicine increased by 15% and >100%, respectively. For tuition fee, Xinhua University and Xinhua School raised its tuition fees by 13-15% and 13%, respectively.
- Kunming schools key growth driver in FY20E. Management expects Haiyuan Collge and Kunming Health School could be financially consolidated in 4Q19 (we assume this can be done on 31 Dec 2019). These schools recorded RMB312m revenue and RMB124mn profit after tax in FY18. We expect its revenue and net profit to grow by double digit in FY19-21E.
- Abundant resources for M&A. As at 30 Jun 2019, the Company had RMB1.2bn cash balance with zero debt. Coupled with >RMB1bn credit line secured, management plans to have 1-2 acquisitions per year which focus on universities with medical or finance majors in Yangtze River Delta, Pearl River Delta or Southwestern region.
- Valuation. We change our adjusted net profit in FY19/20/21E by -4%/ 26%/ 28% to factor in lower margins, higher interest income and contribution from Kunming schools. Our TP is lifted from HK$3.71 to HK$4.50, based on 16.2x FY20E P/E (still at historical average plus 1sd) as we rolled forward our valuation basis (vs. 17.9x FY19E P/E previously). Catalysts: (1) policy overhang removes; (2) M&A; (3) complete financial consolidation of Kunming schools. Risk: surge of teachers’ costs.
