The Company agreed to acquire 100% equity interest of Gongqing College of Nanchang University at a consideration of RMB500mn. We lift FY22/23E adj. NP by 2/3%. The Company is confident to acquire three universities and two vocational colleges in 1-2 years. We anticipate several catalysts in 1-2 years, including conversion of independent colleges and acquisitions. Maintain Buy and raise TP from HK$3.61 to HK3.88.
- Low acquisition cost. The College recorded ~RMB100mn revenue and RMB23mn in FY20. The Company expects the conversion, at RMB200-300mn termination fee, to be completed by 2021. Total consideration of RMB700-800mn is less than estimated replacement cost of RMB900mn. EV/student is estimated at RMB93,000 – 106,000, given that we expect the Company can increase the College’s student enrollment notably after the acquisition. This EV/student valuation is low compared to industry’s acquisition cost for a university (>RMB100,000).
- Synergies with other Jiangxi schools. The College will be the Company’s third college in Jiangxi. The acquisition could provide synergies through student admission, teacher resources and regional school administration.
- Strong growth potential. Jiangxi’s higher education gross enrollment rate (49%) was less than China’s average of 51.9% in 2019. The College could benefit from Jiangxi’ 55% gross enrollment target in 2025E. The College has 7,515 students with capacity of 11,000 students. The site area could support a maximum 20,000+ capacity. The Company will improve the College’s teaching quality, raise tuition fees and get more admission quota after the conversion. The Company targets to double its student and grow its NP at 40% CAGR in five years.
- M&A target secured. Management is confident to achieve its target of three universities and two vocational colleges acquisitions in 1-2 years. The Company has secured a large university as acquisition target, whose revenue is even greater than the Company’s Hope College (the largest university of the Company in China in terms of revenue).
- Maintain Buy. We lifted our FY22/23E adj. NP by 2%/3% to factor in the acquisition of Gongqing College. Our TP is raised from HK$3.61 to HK$3.88, based at 27.3x FY21E P/E, which is still at 1x PEG. Catalysts: (1) M&A; (2) unpeg of independent colleges; (3) policy overhang removed. Risk: surge of teachers’ costs.
