2020-21 tuition fees increase was stronger than expected. We raised FY20-22E EPS by 3-9% and lifted our TP from HK$4.60 to HK$6.38. Trading at 15.5x FY20E P/E, the Company’s valuation is lower than K12 peers’ average of 21.2x. At 29.7% EPS CAGR from FY20E to FY22E (higher than peers’ average of 17%), its 0.52x PEG is far below peers’ average of 1.25x. We think the Company’s low valuation is attractive and unjustified. Maintain Buy.
- 2020-21 school year tuition fees increases beat. The Company will increase tuition and boarding fees of new students in 8 schools by 9-38%, better than our estimates of 10-15% increase in 5 schools. Key schools such as Dongguan Guangming, Dongguan Guangzheng and Huizhou school were covered. The fees increase was also stronger than previous big tuition fee year in FY19 (5-28% in 5 schools). We estimate avg. ASP to increase by low-teens in FY21E (vs +5% in 1H20), stronger than the 8% growth in FY19 when two Dongguan schools raised fees for all sections.
- Entry to higher education a re-rating catalyst. The Company plans to form a JV with HIT Big Data to be the sponsor of the Dongguan Guangzheng Institute of Technology (“DGIT”). The project is supported by Dongguan authority according to management. We think the stock deserves re-rating as the entry to higher education could diversify operation risks, lower policy risks (higher education institutes can choose for-profit). Companies operate both K12 and higher education (Yuhua (6169 HK) and Virscend (1565 HK)) trade at higher P/E and PEG than the Company (Figure 3).
- Redemption of Ping An CB avoids 6% dilution. Recently, the EGM voted against the issue of new shares for the conversion of CBs. Conversion prices of HK$200mn mandatory CB and HK$100mn discretionary CB is set at 20% and 10% discount of average closing price of the 90 trading days before 16 Jul 2020 (HK$2.89, equal to 15.1x FY19 P/E), respectively. Share conversion at low valuation was avoided. The Company will repay the CB by financing and internal cash.
- Maintain Buy. We trimmed FY20E net profit est. by 2% to reflect boarding fees refund, but raised FY21/22E net profit est. by 4/5% mainly to factor in higher tuition fees growth. Our FY20/21/22E EPS is lifted by 3%/7%/9% because of redemption of CB. Our TP is upped from HK$4.60 to HK$6.38, based on 18.4x FY21E P/E (rolled forward from 18x FY20E P/E). Catalysts: (1) better-than-expected student enrolment or tuition fee growth; (2) gov’t approval of DGIT; (3) removal of policy overhang. Risks: (1) policy risks; (2) lower-than-expected student enrollment; (3) surge of teachers’ costs.
