The Company reported its first interim results after changing year-end to Aug. 1HFY20 adj. NP +55% to RMB356mn (vs +69% YoY in 2HFY19 year-ended Dec), 5% above our expectation. We think MOE’s accelerating conversion of independent colleges is a re-rating catalyst of higher education sector. We lifted our TP from HK$2.31 to HK$2.80, based on 28.7x FY20E P/E or 1x PEG. Such PEG valuation is not demanding compared to China Education (839 HK) (1.4x PEG) and Yuhua (6169 HK) (1.2x PEG). Hope Education remains our sector top pick. Maintain Buy.
- Strong 1HFY20 results. Revenue jumped 46% to RMB871mn, led by 21% organic revenue growth and three schools acquired in Sep 2020. GPM widened 1.6ppt to 52.5% led by cost control. We estimate GPM of original businesses +4.6ppt to 55.5% while GPM of the acquired schools was around 38%. Adj. NP margin still expanded 2.4ppt to 40.8% though the Company made income tax provision for Sichuan schools in 1HFY20.
- Organic and M&A growth drivers. As at end of Feb 2020, the Company had cash of RMB2.3bn and seeks acquisition opportunities of universities. In addition, it has organic growth drivers: (1) self-built schools: it plans to open three vocational colleges in Sep 2021; (2) increase of admission quota: nationwide increase of diploma-to-degree quota and continuing growth of quota. Management said that it had a university being granted 30% growth of degree quota; (3) cost control: the Company will continue to adopt lean management and cost control.
- Opportunities of unpeg of independent colleges. MOE has speeded up conversion of independent colleges into universities this year (Figure 3). This would provide further growth opportunities for higher education sector in two ways: (1) more M&A opportunities: private sponsors of independent colleges could be forced to sell if they do not have enough resources to meet conversion requirements; (2) enhance profitability: public universities sponsors of independent colleges could accelerate the negotiation with private sponsors about the “termination fees”. The Company has four independent colleges paying around RMB150mn management fees to public universities a year. Management hopes to settle the conversion within RMB500mn “termination fees”, equivalent to ~4x P/E acquisition.
- Maintain Buy. We forecast the Company to deliver 28.7% EPS CAGR from FY20-22E after switching to year-ended Aug, stronger than sector’s average of 19%. Catalysts: (1) M&A; (2) unpeg of independent colleges; (3) 2020/21 total student enrollment beat; (4) removal of policy overhang. Risk: surge of teachers’ costs.
