FY19 adj. NP (+64%) in line but revenue was 4%/9% below our estimate/consensus. We cut FY20/21E adj. NP by 10%/4% to factor in lower-than-expected revenue and COVID-19 impact. That said, earnings cut could be priced in as the stock fell 11% over past two days. Our TP is adjusted from HK$16.30 to HK$15.80. Trading at 20.8x 1-yr forward P/E and near its low-end P/E range of 20x, we think valuation is attractive. Maintain Buy.
- Revenue below expectation. Adj. NP +64% to RMB900mn, in line with our estimate and consensus. Revenue rose 20% (vs 27% in 1H19), led by 10% ASP growth and 9% growth of average students enrolled. GPM widened 6.2ppt to 58.4%, 3.8/1.9ppt above our estimate/consensus, because of ramp-up of newly established schools in FY17-18 and costs control. SG&A expenses ratio (excluding RMB116mn share-based expenses) fell 3.3ppt thanks to moderated school expansion and operating leverage. In 2H19, revenue climbed 14% YoY, GPM +4.6ppt to 56.3% (+2.3ppt if excl. HKFRS 16 impact by our est.), adj. NP +49% with adj. NPM +5.5ppt to 23.6%.
- COVID-19 impact. The Company has arranged online tuitions to students given that physical classes have been suspended temporarily since 20 Feb. No refund or withdrawal from students were received so far. Admission for new students has been suspended but online consultation continues. Management expects physical classes would gradually resume in Apr. Given the softening economic growth, we think this could increase demand of vocational training.
- FY20E outlook. The Company plans to add 24 net openings in FY20E (vs 14 in FY19). Also, it will explore opportunities in other industry sectors such as beauty, healthcare and AI. Its first beauty school was opened in Chengdu this year to test market response. Sitting on RMB6.2bn net cash and financial assets, we think the Company would monitor M&A opportunities to accelerate new industry sector development.
- Maintain Buy but lower TP to HK$15.80. We cut FY20/21E adj. NP by 10%/4% to factor in lower-than-expected revenue and disrupted admission for new students admission. Our TP is revised from HK$16.30 to HK$15.80 based on 26.0x average FY20E and FY21E EPS (vs 27.4x FY20E P/E previously). We forecast the Company to post 20% adj. EPS CAGR in FY19-22E. Catalyst: M&A. Risk: lower-than-expected student enrollment.
