1H19 net profit +44%, in line with its positive alert guidance. Adj. net profit rose 88% to RMB408mn, which represents 44% of our FY19E estimate (3Q is the peak season of a year). We think the results were on track with our FY19 estimates.
- 1H19 results in line. Net profit rose 44% to RMB327mn, in line with CEE’s profit alert guidance of 40%+ growth. If RMB76mn share-based expenses and RMB19mn listing fees are excluded, adj. net profit surged 88% to RMB408mn, equivalent to 44% of our FY19E adj. net profit estimate (vs 40% in 1H18). Revenue increased 27%, led by 14% growth of ASP and 11% growth of average students enrolled. The ASP growth was mainly led by 2ppt increase of short-term student mix (short-term courses usually have higher annualized tuition fee than long-term courses). Like-for-like ASP growth was around 3-5% in 1H19. GPM widened 7.9ppt to 60.8% (58.6% if impact from HKFRS 16 is excluded), because of ramp-up of newly established schools. SG&A expenses ratio (excluding RMB76mn share-based expenses) fell 4.7ppt thanks to ramp-up of newly established schools and less new schools opened during the period.
- 2H19E outlook. Jul to Sep is the peak season for the Company. Management revealed the progress of new student enrollment in Jul and Aug was satisfactory. The expansion of vocational college student admission by 1mn does not affect the Company’s new student enrollment because the target customers of vocational colleges and the Company are different (high school graduates looking for further study vs customers aged between 15 and 45 looking for a job). Number of new schools in 2H19 could reduce from 15 to 10 because certain school operation permits have not been received. We think the earnings impact of such delay is insignificant and keep our estimates unchanged.
- Commence beauty training. The Company has been exploring the vocational training market for beauty, AI and healthcare industries. The Company plans to open one beauty training school in 2H19 and one more in 2020 to test market response before considering this segment’s expansion plan of school network.
- Maintain Buy. Our TP is based on 27.4x FY20E P/E, on par to the average of FY21E P/E of New Oriental Education and TAL Education. For cross-checking, our TP implies 18.3x/13.5x EV/EBITDA in FY19/20E, which is at 11%/11% discount compared to segment leaders’ average of 20.6x/15.1x. This suggests our TP is not aggressive. Catalyst: Inclusion of the stock into the Shenzhen-Hong Kong Connect list in Sep 2019.
