1HFY20 NP rose 38% YoY, representing 58% of our FY20E NP. The results were better than our expectation driven by better GPM, SG&A expenses and other income. We raised FY20-22E net profit by 3-4% and our TP from HK$4.40 to HK$4.60. Trading at 13.4x FY20E P/E, valuation is attractive compared to 27% EPS CAGR from FY19 to FY22E. Maintain Buy.
- Results beat. Revenue climbed 12% to RMB1,682mn, representing 46% of our FY20E revenue, less than our estimates because ancillary services revenue only rose 2% given that certain services were suspended due to COVID-19 outbreak. GPM widened 1.4ppt to 46.7% due to 5% ASP growth and costs control. Other income jumped four times due to RMB40mn increase of government grant. SG&A expenses reduced by 1.5ppt to 17.2% thanks to costs control. Effective tax rate rose from 14.8% to 19.4% mainly due to tax on government grant.
- COVID-19 impact insignificant. During the coronavirus outbreak, the Company provides online learning activities for students. Management expects physical classes would gradually resume in Apr and May. We estimate the loss of revenue of ancillary services such as canteen, supermarket, school bus, etc could be around two months.
- High visibility of growth potential. Management plans to add one asset-light school in Dongguan or Foshan in 2020-21 school year, and open Chaozhou and Jiangmen schools in 2021-22 school year. Total expected maximum capacity of existing schools and planned new schools would exceed 142,870, representing 138% of current student enrollment of 60,116.
- Explore new businesses in mid to long-term. The Company plans to diversify its businesses in three ways: (1) Online education. A subsidiary is set up to explore the provision of online parent-child learning activities, extra-curricular activity classes and teacher training courses at weekends; (2) Higher education. The Company is seeking cooperation with renowned universities to provide high-end talent training in Guangdong; (3) School management. The Company is considering to provide school management services underpinned by its 20 years of experience.
- Maintain Buy. We lifted FY20-22E net profit estimates by 3-4% due to better GPM, SG&A expenses and other income assumptions. Our TP is revised from HK$4.40 to HK$4.60, still based on 18x FY20E P/E. 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) M&A; (3) removal of policy overhang. Risks: (1) policy risks; (2) lower-than-expected student enrollment or tuition fee growth; (3) surge of teachers’ costs.
