Adj. NP +48% to RMB474mn, in line with our estimates but 6% above consensus. We trimmed FY20/21E adj. NP by 1%/3% as we delay tuition fee increase by one year to 2021/22 school year because of softening economic growth. Our TP is fine tuned from HK$2.33 to HK$2.31, still based on 21.4x FY20E P/E (vs 34% adj. EPS CAGR in FY19-21E). Hope Education is still our top pick because it has both good organic and M&A growth drivers. Compared to peers, its provision of 15% income tax for Sichuan colleges in FY19 has released most risk of rising tax rate in advance due to registration as for-profit schools.
- Strong FY19 results. Revenue rose 29% to RMB1,331mn, in line with our estimates and consensus, led by 20% organic revenue growth (21% organic student enrollment growth) and acquisitions. GPM surprisingly jumped 5.3ppt to 50.7%, beating our estimates/consensus by 3.4/3.1ppt as organic portion teachers’ costs only up ~2% and utilization rate rose from 80% to 82%. The Company unexpectedly recorded RMB66mn tax expenses by making 15% tax provision for its Sichuan colleges because the Company would submit its intention to convert its colleges in Sichuan to for-profit schools by Sep 2020.
- Expect increase of admission quota. COVID-19 does not have negative impact on the Company as tuition and boarding fees of spring semester were received and offline lectures were replaced by online learning. On the other hand, due to the softening employment market, management expects the government to further increase admission quota in 2020/21 school year after raising quota of diploma-to-degree in Feb. The Company has enrolled 7,042 part-time diploma students from veteran soldiers and unemployed workers.
- Organic and M&A growth drivers. As at end of 2019, the Company had cash and structured deposit of RMB2.9bn. For M&A, it plans to acquire universities. For organic growth, it will strive to increase enrollment scale and registration rate, enhance employee services and provide overseas study services. It also has three new greenfield projects of vocational colleges (Chongqing, Jiangxi and Gansu projects) as long-term growth drivers.
- Maintain Buy. Due to softening economic growth, we delay tuition fee increase by one year to 2021/22 school year. We trimmed FY20/21E adj. net profit estimates by 1%/3% and fine tuned our TP from HK$2.33 to HK$2.31, still based on 21.4x FY20E P/E. We expect the Company to deliver 34% adj. EPS CAGR in FY19-21E, which is stronger than peers’ average of 26%. Catalysts: (1) M&A; (2) removal of policy overhang. Risk: surge of teachers’ costs.
