We visited the Company’s new acquisitions, Yinchuan University of Energy and Suzhou TOP IT Institute, during the reverse roadshow last week. We think the quality of University of Energy is decent. Management targets to grow net profit of the Yinchuan schools and Suzhou TOP IT Institute by CAGR of 60% and 89%, respectively, from FY19E to FY22E. Because the Company has good track records of post-acquisition integration and enhancement, we think these targets are achievable. Maintain Buy.
- Decent quality of University of Energy. It is the only private university that can enroll foreign students in Ningxia. Its ICT Industry & Education Innovation Center, established by MOE and ZTE, is the only one in Ningxia. The university has one national-level laboratory and three provincial-level teaching demonstrative centers.
- High growth potential of Yinchuan schools. Management targets to grow the schools’ net profit at a CAGR of 60% from around RMB25-30mn in FY19E to RMB100mn+ in FY22E by raising student enrollment and tuition fees, controlling expenses and replacing high-cost borrowings. Total student enrollment is expected to increase from current 15,496 to 30,000+ in five years. Through increase of admission quota, registration rate and enrollment of non Ningxia students, total student enrollment of degree and diploma is anticipated to double from ~12,000 to ~24,000. Management looks for 30%+ tuition fees growth in five years.
- Suzhou TOP IT Institute 3-yr net profit CAGR of 89%. Management targets to grow its net profit from ~RMB6mn in FY19E to ~RMB40mn in FY22E. Management plans to improve the school’s registration rate (70%+) and increase student enrollment from non-Jiangsu provinces (20% now). Helped by the Company’s student enrollment capability, management expects to grow new student enrollment from 1,700 in Sep 2019 to 4,000 in Sep 2020 and lower the schools’ student acquisition cost. Annual tuition fees of certain majors can be raised to RMB14,000-15,000 from current RMB12,000 by filing when timing is appropriate. Capacity of students can be raised from current 6,000 to 9,000 by Sep 2020 and further to 15,000 when the development of Phase 2 completes.
- Our FY19-21E EPS are 6-8% above consensus; Maintain Buy. We forecast the company to post 31% adj. EPS CAGR in FY20-21E (vs peers’ average of 25%). Our TP of HK$1.96 is based on 18.0x FY20E P/E (at historical average plus 1sd). Catalysts: (1) policy overhang removes; (2) M&A. Risk: surge of teachers’ costs.
