FY19 adjusted NP rose 34% YoY, 5% above consensus. The Company is exploring asset-light model in Dongguan and Foshan to meet education demand. We think this could accelerate expansion pace and enhance return. We trimmed FY20/21E EPS by 3%/7%. Maintain Buy.
- Adjusted NP above consensus. NP increased 16% YoY to RMB359mn. Adjusted NP rose 34% to RMB434mn, 5% above consensus and 4% below our estimates. Revenue climbed 35% to RMB1,682mn, 2%/4% below consensus/our estimates. GPM increased 0.4ppt to 44.1%, 1.2ppt/1.4ppt lower than consensus/our estimates, mainly due to 50% growth of teacher costs (28% growth of teachers and salaries increase). SG&A expenses reduced by 2.7ppt to 16.6%, 1.0ppt lower than our estimates due to less than expected administrative expenses.
- Explore asset-light model to enhance return. Given the strong demand in certain Guangdong cities, the Company has identified certain properties in Dongguan and Foshan, and is negotiating with property owners and authorities to transform these properties to school properties (3,000-5,000 student capacity). If successful, some asset-light schools could be opened in Sep 2020. We think the Company has strong brand equity in Dongguan so it could admit students easily. Asset-light approach could accelerate expansion pace (vs finding a new site to build school) and improve ROE.
- Focus on Greater Bay Area. Besides the existing schools in Dongguan, Huizhou and Foshan, the Company has entered into agreements with local governments of Jiangmen, Guangzhou and Zhaoqing to set up new schools. The Company also plans to raise the maximum capacity of Dongguan Guangzheng school (from 18,000 to 20,000) and Huizhou school (from 10,500 to 12,000). The Company intends to cover all nine cities of the Greater Bay Area in future.
- High visibility of expansion potential. Total expected maximum capacity of existing schools and planned new schools rose 10% to 142,870, representing 138% of current student enrollment of 60,116.
- Maintain Buy. We lowered FY20/21E net profit estimates by 3%/7% to mainly factor in lower revenue and GPM assumptions. Our TP is fine-tuned from HK$4.60 to HK$4.40, still based on 18x FY20E P/E. The stock trades at 14.2x FY20E P/E. We think valuation is attractive compared to 26% EPS CAGR from FY19 to FY22E. We continue to like the Company’s Guangdong -focused expansion strategy and expansion visibility. Catalysts: (1) better-than-expected student enrolment or tuition fee growth; (2) more new projects in the Greater Bay Area. Risks: (1) policy risks; (2) lower-than-expected student enrollment or tuition fee growth; (3) surge of teachers’ costs.
