Student enrollment as of 1 Sep increased 17% YoY to 60,116, 4% below our estimates. The Company targets to admit transferred students in second semester and boost ancillary services revenue to improve revenue growth in FY20E. We lowered FY20/21E net profit estimates by 6%/4% and TP from HK$5.40 to HK$4.60.
- Student enrollment missed. WE reported student enrollment of 60,116 as of 1 Sep 2019, +17% from 51,520 students as of 1 Sep 2018. The student number is below the Company’s target of 62,000-63,000 and our FY20E estimate of 62,516 (4% below).
- Reasons for the miss. We attribute the miss to the following reasons: (1) student enrollment of Jieyang school and Weifang school stayed flat after the schools raised tuition fees by ~30% (from primary to high schools) and 22-24% (middle and high schools), respectively; (2) student enrollment of Dongguan Guangming branch school was flattish because certain construction work was delayed. That said, student enrollment of Dongguan Guangzheng school was better than our expectation though its high school tuition fees was lifted by 42%. WE also commenced operation of a new school in Bazhong, Sichuan and its student enrollment was satisfactory at 500-600.
- Measures to boost revenue growth. WE plans to admit transferred students in the second semester of 2019/20 school year, especially in the three new schools (Foshan, Bazhong and Yunfu) to boost FY20E student enrollment. Also, it targets to increase ancillary services revenue by offering more services (such as extra-curricular activities) and increasing prices.
- Valuation. We lowered FY20/21E net profit estimates by 6%/4% to mainly factor in 4% drop of student enrollment estimates in FY20/21E. Our TP is cut from HK$5.40 to HK$4.60, based on 18x FY20E P/E (vs 19x previously). We continue to like WE’s organic growth potential given its Guangdong-focused expansion strategy and its maximum capacity of existing schools and pipeline projects (129,370 students) equals 115% of current student enrollment. Catalysts: (1) better-than-expected student enrolment or tuition fee growth; (2) more new projects in Guangdong. Risks: (1) policy risks; (2) lower-than-expected student enrollment or tuition fee growth; (3) surge of teachers’ costs.
