We think the profit slump in FY20E is mainly due to COVID-19 which severely affected student enrollment in 2020 spring semester and delayed Zhongkao as well as Gaokao. We forecast adj. NP would strongly rebound 106% YoY in FY21E (+31% vs FY19 adj. NP). Our TP was adjusted from HK$19.60 to HK$19.30, still at 31.7x FY21E P/E. Maintain Buy.
- Profit warning. The Company expects a 5-10% decline of revenue (vs -17% in 1H20), a 30-50% decline of adj. NP (vs -48% in 1H20) and a 50-70% decline of net profit in FY20E. The decline of adj. NP is caused by 5% YTD drop of new student enrollments (vs -20% in 1H20) and around RMB150mn unrealized exchange losses (depreciation of HK$ deposit against RMB).
- Results decline mainly due to COVID-19. The decline of revenue and adjusted NP was greater than our expectation of -3% and -12%, respectively. Firstly, the delay of Zhongkao and Gaokao by 1-2 months also postponed the registration of new students, which deferred the recognition of tuition fees of new students by 1-2 months compared to 2H19. Secondly, the delay of Zhongkao and Gaokao also increased A&P expenses compared to 2H19 because the Company extended its marketing campaign to Jul - Sep in 2H20 (vs Jul - Aug in 2H19). Thirdly, teacher costs rebounded in 2H20E (vs -7% in 1H20) after no further savings from social security fees.
- Expanding secondary vocation education. To expand sources of students, the Company secured more secondary vocational education licenses for Wontone brand and added new majors related to urban rail transit. Total number of schools providing secondary vocational education increased to 38 from 9 as at 31 Dec 2018. Number of new students of Wontone brand increased 15% YTD. In FY21E, the Company plans to secure more secondary vocational education licenses for New East and Xinhua Computer brands to expand source of student enrollment.
- Network expansion on track. The Company now has 200 schools, on track to our FY20E estimate of 202 schools. Number of students of its Chengdu beauty school reached 560 now, exceeding its target of 400-500. Two more beauty training schools will open in Zhengzhou and Changsha in FY21E.
- Maintain Buy but lower TP to HK$19.30. We lowered FY20/21/22E adj. NP by 28%/3%/1% mainly to factor in the disruptions by COVID-19. Our TP is revised from HK$19.60 to HK$19.30, still at 31.7x FY21E P/E which is based at 15% discount to education segment leaders’ average. Catalysts: M&A, student enrollment beats. Risk: lower-than-expected student enrollment.
