1H20 adj. NP fell 28% affected by COVID-19. Given that all schools have reopened in June, individualized tutoring revenue +29% in July (vs -21% in 1H20) while small group revenue growth was flat (vs -9% in 1H20). We lowered FY20-22E adj. NP by 11-15% and cut TP from HK$5.14 to HK$4.44, still at 18.7x average FY20E and FY21E EPS. Maintain Buy.
- 1H20 results affected by COVID-19. NP fell 28% to RMB55mn. Adj. NP fell 16% to RMB64mn. Revenue decreased 11% led by 13% drop of tutoring hours. Small group tutoring revenue fell 9% as offline to online conversion rate was 85%. Individualized tutoring revenue declined 21% because parents delayed consumption of tutor hours until reopening of schools. GPM narrowed by 5.8ppt to 35.6%. Adj. NPM only narrowed 0.4ppt to 8.3% because the operating deleverage was partly offset by 180% increase in FV gain of investments.
- Individualized tutoring led the recovery. After all schools reopened in June, more than 90% of students returned to offline courses. Individualized tutoring revenue jumped 29% in July because students came back for offline courses. On the other hand, small group revenue growth was flat in July because the number of student enrollments is still at recovering stage. We think the recovery would be a gradual process.
- Introduced promotions to attract students. The Company introduced Summer One Program targeting different markets. Number of students in regions outside Guangzhou grew 52% YoY. This should help recovering student growth post COVID-19. Management expects a steady summer class conversion rate this year.
- Expansion through M&A and opening new schools. As at 30 June, the Company had RMB1.2bn net cash (including equity and debt investments). The Company looks to cherry-pick targets with synergies such as operating in uncovered regions and having special curriculum features. For new schools, the Company maintains target to add 20 in 2H20E and 40-50 in FY21E.
- Maintain Buy. We lowered our FY20/21/22E adj. NP estimates by 11%/15%/15% Our TP is revised from HK$5.14 to HK$4.44, still at 18.7x average FY20E and FY21E EPS. Catalysts: (1) better-than-expected student enrollment; (2) M&A. Risks: (1) 2H20E recovery weaker-than-expected; (2) government policies.
