Despite short-term business disruption by COVID-19, we expect this could accelerate industry consolidation and provide the Company with M&A opportunities. The Company would benefit from increasing tutoring demand in the Greater Bay Area. After 25%/1% earnings cut in FY20/21E, our TP is adjusted from HK$5.16 to HK$5.14, representing 18.7x average FY20E and FY21E EPS (vs 18.7x FY20E P/E previously). Maintain Buy.
- COVID-19 impact. The Company suspended all offline classes as required by government and switched them to online teaching given that it has online teaching systems. The conversion rate of winter-break classes from offline to online was satisfactory at 85%, while the withdrawal rate was 4.2%. For spring semester classes, the conversion rate was 82%, similar to 83% in 2019, while the withdrawal rate was 2.5%.
- Accelerating industry consolidation. Guangdong’s K12 after-school tutoring sector is fragmented with top five players accounting for 7.6% market share in 2018. Given that certain small industry players do not have online teaching capability, we expect these players could be forced to exit due to cash flow problems. In addition, the Company could make acquisitions to expand its school network thanks to its strong cash position (RMB1.3bn cash and investments at end of FY19). The Company had track record in establishing its presences in Shanghai, Jiangsu and Zhuhai through acquisitions. Therefore, we think the Company could benefit from accelerating industry consolidation.
- FY20E outlook. Various provinces have announced K12 school reopening dates. We expect Guangdong could follow this month and after-school tutoring services could be resumed after school reopening. Tuition hours of summer-break classes could be shortened as Gaokao and Zhongkao are delayed by one month. We expect FY20E GPM to decline due to slowing revenue growth. Number of centers opening will be reduced to around 20 due to COVID-19 disruption and accelerated promotion of OMO education. Because of high conversion rate (93%) of individualized tutoring from offline to online winter-break classes, planned openings of individualized tutoring centers are reduced.
- FY19 results beat. Adj. NP jumped 62% to RMB166mn, 10%/5% above our estimates/profit alert’s guidance of 30%+ adj. NP growth. The results beat was mainly due to 0.8ppt stronger-than-expected GPM. Revenue +24% in line. SG&A and research expenses ratio fell 1.0ppt and 2.6ppt, respectively, thanks to operating leverage. Effective tax rate lowered from 32% in FY18? to 14% in FY19? as Guangzhou Beststudy obtained high-tech enterprise qualification.
- Maintain Buy. We lowered FY20/21E adj. net profit estimates by 25%/1% to reflect COVID-19 impact and stronger-than-expect FY19 GPM. Our TP is revised from HK$5.16 to HK$5.14, representing 18.7x average FY20E and FY21E EPS. Catalysts: (1) better-than-expected student enrollment; (2) M&A. Risks: (1) uncertainties from COVID-19; (2) teacher cost pressure; (3) government policies.
