FY19 adjusted net profit rose 14% YoY to RMB296mn, 6% above our estimates (mainly due to higher other income) and in line with consensus. We cut our FY20/21E adjusted net profit by 25%/29% as we took Kunming schools away from our forecast. Valuation is attractive given that the stock trades at 9.6x FY20E P/E, at the low-end of its P/E band (9x). Maintain Buy and lowered TP from HK$4.50 to HK$2.85, based on 12.8x FY20E P/E. Next catalyst is M&A.
- FY19 results in line with consensus. Revenue climbed 13% led by 12% ASP growth. Revenue of Xinhua University rose 11% YoY to RMB348mn (representing 90% of total revenue), driven by 13% ASP growth. In 2019/20 school year, new student enrollment rose 10% to 6,790 and average tuition fee of new student jumped 15.5%. GPM was flat at 59.7% with 2H19 GPM +1.0ppt to 54.7%. Operational income of Hongshan College was around RMB19mn, while operation loss of School of Clinical Medicine was around RMB9mn. SG&A expenses ratio gained 6.7ppt to 23.3%, arising from increase of equity-settled payment, recruitment of talents and expenses for M&A activities. Adjusted NPM widened 0.6ppt to 67.6%.
- TimeLine of independent colleges unpegging. Construction of the new campus of School of Clinical Medicine began and phase I is expected to operate before 1 Sep 2021. Unpegging timetable is 2021 at earliest. On the other hand, construction work of new campus of Hongshan College work would start before 30 Jun 2020.
- Kunming schools acquisition stalled. Because of uncertainties in the timing of transformation of Haiyuan College to a wholly privately-owned college, we take Kunming schools away from our forecast.
- Abundant resources for M&A. As at 31 Dec 2019, the Company had RMB1.4bn cash balance or RMB1.1bn net cash. The Company signed strategic operation agreement with ICBC Heifei Branch which intentionally to provide RMB5bn credit line for the Company next five years. Management plans to have 1-2 acquisitions per year which focus on universities with medical or finance majors in Yangtze River Delta.
- Valuation. We cut our adjusted net profit in FY20/21E by 25%/ 29% to take Kunming schools away from our forecast. Our TP is cut from HK$4.50 to HK$2.85, based on 12.8x FY20E P/E which is at historical average (vs. 17.9x P/E previously). Catalysts: (1) M&A; (2) policy overhang removes. Risk: surge of teachers’ costs.
