We hosted investors meetings with Beststudy mgmt. recently. Investors are interested in industry consolidation opportunities, operation performance and school reopening schedule. Despite a short-term business disruption by COVID-19, we expect this could speed up industry consolidation. The Company could gain market share and accelerate expansion by acquisitions. The Company will focus on Greater Bay Area expansion and move into OMO model. Maintain Buy.
- Reopening schedule not fixed yet. According to Guangdong’s policy, primary and secondary schools will gradually reopen in May while the reopening schedule of kindergarten is not yet fixed. The reopening of K12 after school tutoring will be at the same time with kindergartens. The commencement of 2020 summer holiday is no later than 1 Aug, 2-3 weeks later than 2019’s. That said, we think the Company could launch short-term courses in July to compensate shortened summer break tutoring hours.
- Accelerating industry consolidation. Firstly, many small industry players without online learning capability were closed due to operating cash flow issues. Guangdong’s K12 after-school tutoring sector is fragmented with top five players accounting for 7.6% market share in 2018. There is room for leading players to gain market share. Secondly, the Company has been reviewing various potential acquisition targets (annual revenue up to ~RMB100mn) inside and outside Guangdong. Backed by strong balance sheet (RMB1.3bn cash and investments at end of FY19), the Company looks to cherry-pick targets with synergies such as operating in uncovered regions. Thirdly, shop rental has dropped and some institutions have cut teachers’ salary or asked teachers to take no pay leave amid epidemic. We think the Company could pick prime locations to expand its school network and hire quality teachers at lower costs.
- FY20E outlook. While the conversion rates from offline winter-break classes to online and from winter-break classes to spring semester were satisfactory at 85% and 82%, respectively. The temporary shutdown of schools has affected acquisition of new customers. We forecast revenue to drop by high single-digit in 1H and rebound by 20%+ in 2H.
- Maintain Buy. Our TP of HK$5.14 represents 18.7x average FY20E and FY21E EPS. Catalysts: (1) better-than-expected student enrollment; (2) M&A. Risks: (1) uncertainties from COVID-19; (2) 2H20E recovery weaker-than-expected; (3) government policies.
