1H20 adj. NP +17%, ~56% of our FY20E adj. NP (vs 52-53% in past two years), above our expectation. The Company got 18% degree quota growth in 2020-21 school year and began providing value-added services. Hence, we lifted FY20-22E adj. NP by 5-6% and raised TP from HK$2.85 to HK$2.97, still at 12.8x FY20E P/E which is at historical average. Valuation is undemanding given that the stock trades at 9.5x FY20E P/E, at the low-end of its P/E band (9x) and 45% below sector average P/E of 19.3x. Maintain Buy on its leading position in Yangtze River Delta region and expanding new revenue sources.
- 1H20 results. Revenue climbed 8% led by 15% tuition fees growth (incl. 3% full-time student growth) while boarding fees fell 58% due to refund amid epidemic. Revenue growth would be 14% if no refund happened. GPM widened 6.7ppt to 71.0% as teaching-related expenses were reduced due to epidemic. Other income jumped 52% as two entrusted independent colleges contributed RMB25mn gain. NP growth was flat due to increase of share based payment and forex loss. Adj NP increased 17% if such expenses were excluded.
- 2020-21 school year quota and tuition fee. Admission quota of the Company’s three colleges increased 7%. That said, degree quota impressively jumped 18% to 10,764 led by 865% growth from diploma to degree. Average tuition fees of Xinhua University increased by ~6% (vs 12.5% growth last year), while tuition fees for the two independent colleges maintained.
- Expect conversion of two independent colleges in 2021. The phase one of new campuses of Hongshan College and School of Clinical Medicine would commence operation in Sep 2021, which satisfies a key condition for conversion. The Company is not required to pay any termination fees for conversion. The Company expects to complete their conversion in 2021. If successful, we estimate this would enhance FY22E adj. NP by 10%.
- Diversify revenue source. The Company established a department to provide value-added services for students such as professional qualification exams, practical training and other areas with the orientation of employment.
- M&A. The Company had RMB1.1bn cash balance as at 30 Jun. It will look for opportunities from conversion of independent colleges as well as private colleges in regions attractive for talents or with low gross enrollment rate.
- Upped estimates. We lifted our adj. NP in FY20-22E by 5-6% to factor in better quota growth & value-added services revenue source. Catalysts: (1) M&A; (2) conversion of independent colleges. Risk: surge of teachers’ costs.
