The Company announced deals to acquire 29.76% equity interests of Dingli (300050 CH). After the acquisition, the Company will remain focusing on asset heavy, formal higher education while Dingli will focus on asset light, college management output. We think the deal could accelerate the Company’s development in vocational education and enhance its curriculum development capability in technology area. Management plans to dispose non-core technology businesses to lower business volatility. The stock trades at 16.1x FY21E P/E, we think valuation is attractive given 31.1% EPS CAGR in FY20-22E. Maintain Buy.
- Acquisition of controlling stakes of Dingli. Through the acquisition of shares from Dingli’s controlling shareholder and new shares subscription, the Company will spend RMB1.29bn to own 29.76% equity interest of Dingli.
- Asset light approach to accelerate growth. Dingli has two business segments: telecom technology & IoT and vocational education. It is a leading player in higher education curricula research and output of college management. Since the establishment of first Dingli College in 2015, it has cooperated with 37 universities and vocational colleges to operate 19 Dingli Colleges and 18 majors cooperation projects. It provides curriculum development, teaching, student admission and employment services and receives certain portion of tuition fees as revenue.
- Target to set up 100 Dingli colleges in three years. The Company plans to group both parties’ strong majors to output college management. The Company can leverage its strength in nationwide student admission capability (proved again in the three colleges acquired in 2019) to help Dingli enroll more students (current Dingli College’s utilization rate ~40-50%). There were 2,688 higher education institutes in 2019 in China. The Company plans to lift number of Dingli Colleges to 100 in three years.
- Vocational education supported by policies. School-enterprise cooperation is the future trend. As tuition fee will be determined by market (for-profit schools), colleges which can help graduates to get high-salary jobs can set a higher tuition fee than other colleges. We think the deal could accelerate the Company’s development in vocational education and enhance its curriculum development capability in technology.
- Maintain Buy. We raise FY21/22E adj. NP by 5% mainly to reflect lower finance cost after refinancing in Aug 2020. We forecast Hope Education to deliver 31.1% adj. EPS CAGR from FY20-22E, stronger than sector’s average of 23%. Our TP is fine tuned from HK$3.17 to HK$3.05 based on 31.1x FY20E P/E and still at 1x PEG, as we factor in EPS dilution from share placement. Catalysts: (1) M&A; (2) policy overhang removes; (3) unpeg of independent colleges. Risk: surge of teachers’ costs.
