2020/21 school year total student enrollment for self-operated schools +12% to around 67,162. The figure was in line but the student mix was less favorable than expected. Dongguan Guangzheng student number just mildly increased due to capacity constraint. Its tuition fee is the second highest among all the schools of the Company. Trading at 9.7x FY21E P/E, the Company’s valuation is lower than K12 peers’ average of 15.6x. Its 0.4x PEG is far below peers’ average of 0.7x. We think the Company’s low valuation is attractive and unjustified. The recent share price volatility was due to policy concerns about VIE structure and not-for-profit nature of compulsory education. We believe such concerns have been factored in because they were addressed in the draft for comments version of the Law in Nov 2018. Maintain Buy.
- Total student enrollment in line. The Company reported total student enrollment of 71,362 at the commencement of 2020/21 school year. Excluding around 4,200 students from newly managed third-party schools, total student enrollment from self-operated schools rose 12% or increased by 7,046 students to around 67,162, in line with our estimates.
- But student mix less favorable than expected. Total student enrollment growth was led by strong growth in Huizhou school. Number of students at Huizhou school almost reached its maximum capacity of 14,000. That said, Dongguan Guangzheng student number only mildly increased due to capacity constraint. The Company has not received fire-fighting check approval from the authority for its newly-built campus buildings, which limits the dormitory capacity. Because tuition fee level of DGGZ is the second highest within the Company, the less favorable student mix slightly lowers ASP by 2%. We also trim FY22E total student enrollment by 2%.
- School management services. The Company (through WOFE) entered into management services agreement with around 10 kindergartens and primary schools in Dongguan. It will receive annual fixed fee from each managed school at around RMB1,000 per student for provision of teachers training, student admission training, school decoration advice. The Company targets 30% student growth in FY22E.
- Maintain Buy. We lower FY21/22E NP by 3%/7% as we trim revenue by 1%/3%. Our estimate for FY19-22E EPS CAGR is changed from 28% to 25% following earnings revision and dilution from share placement. Our TP is revised down from HK$6.38 to HK$5.61, representing on 17.4x FY21E P/E and still at 0.7x PEG. Catalysts: (1) gov’t approval of vocational college project; (2) removal of policy overhang. Risks: (1) policy risks; (2) surge of teachers’ costs.
