FY20 NP jumped 42% to RMB512mn, 10%/5% above our estimates/consensus, due to better than expected GPM and opex control. We think certain expenses (such as teachers’ on duty expenses and social security levies) were temporarily saved amid epidemic in 2HFY20 and could rebound in FY21E. Therefore, we mildly revised up FY21/22E NP by 2%/1%. The Company’s 11.6x FY21E P/E is lower than K12 peers’ average of 14.6x. Its 0.46x FY21E PEG is also below peers’ average of 0.7x. We think the Company’s low valuation is attractive and unjustified. MOE’s open stance on legal and compliant connected party transactions of non-profit private school sponsors is positive to K12 formal education. Maintain Buy.
- Results highlight. Revenue rose 7%, in line with our estimate and 4% below consensus. In 2HFY20, revenue growth slowed to 3% from 12% in 1HFY20 because RMB30mn boarding fee was refunded and ancillary services business was affected by epidemic. GPM jumped 4.3ppt to 48.4%, 3.6ppt/3ppt above our estimates/consensus. It is because teachers’ on-duty costs and social security levies were reduced amid epidemic. Also, sales of lower-margin ancillary services business was lowered by 4ppt to 27.9%. SG&A expenses ratio lowered 1.1ppt to 15.5% thanks to tighter cost control.
- High visibility of growth potential. Management targets to add three new K12 schools (Chaozhou, Jiangmen and Zhongshan) in FY21E and Bazhong Guangzheng Institute of Technology in FY22E. Total expected maximum capacity of existing schools and planned new schools would exceed 173,870, representing 159% of current student enrollment of 67,162.
- Ambitious 3-year target. We expect the Company to become a diversified education group (K12, online education and higher education) in medium term. Management targets to reach 150,000 students (including acquisitions, managed schools and new asset heavy and light schools) in 3 years, implying a 3-yr CAGR of 28%. We now forecast 11% CAGR of student enrollment from FY20-23E and look forward to Company’s acquisitions and new projects. Capex per year is RMB1bn or above. Net gearing ratio was 41% in FY20 and there is still room to gear up.
- Maintain Buy. We fine-tuned our FY21/22E NP by 2%/1% to reflect lower SG&A expenses ratio. Our FY19-22E EPS CAGR is still at 25%. Our TP is revised from HK$5.61 to HK$5.80, representing on 17.7x FY21E P/E and still at 0.7x PEG. Catalysts: (1) gov’t approval of vocational college projects; (2) new projects and acquisitions; (3) removal of policy overhang. Risks: (1) policy risks; (2) surge of teachers’ costs.
