Adj. NP fell 44% to RMB500mn, 27%/13% below consensus/our estimates due to lower GPM and higher eff. tax rate. However, we think the strong recovery of new students enrolled (15% growth compared to corresponding period in 2019) should be more vital than missed earnings. Our TP was lifted from HK$19.30 to HK$20.80. We forecast the Company to post record high revenue and adj. NP in FY21E. Share price was 18% below record high on 23 Jul 2020. The stock trades at 26.8x FY21E P/E, near the trough of P/E band. Valuation is attractive. Maintain Buy.
- Results highlights. Revenue fell 7% to RMB3,649mn, 2% above our est./4% below consensus. Number of new students enrolled dropped 5% (vs 20% drop in 1H20) as pandemic outbreak affected admission. GPM fell 4.4ppt to 54.0% on operating deleverage, 1ppt below our estimates. Selling exp. ratio up 4.8ppt to 22.7% because the Company further spent in ad in 2Q20 and increased ad for new schools (26 new schools in FY20 vs 14 in FY19). Eff. tax rate jumped from 20.7% in FY19 to 41.9% in FY20 because certain schools made loss. The Company paid a special dividend of HK$0.135/sh making payout ratio to 105%.
- New students enrolled grows from pre-pandemic level. As at 20 Mar 2020, number of new students enrolled increased 15% compared to corresponding period in 2019, driven by 50%+ growth of Omick, 40%+ growth of Wontone. 3-year secondary vocation students saw 100% growth. The Company plans to add more schools to operate secondary vocational education business this year.
- M&A strategy. The Company had RMB6.1bn net cash at end of FY20. It plans to acquire (1) vocational education companies which focus on industries different from its own (culinary arts, computer & internet, auto) such as beauty, etc., and (2) secondary vocational schools, which could benefit from the government’s policy to increase mix of secondary vocational students to 50% from 40%.
- Network expansion on track. The Company had 206 schools in end of FY20. It plans to open around 20 new schools per year. Annual capex is around RMB800-900mn, which could be totally financed by its operating cash flow (>RMB1bn per year).
Maintain Buy but lifted TP to HK$20.80. We lowered FY21/22E adj. NP by 5%/7% mainly to factor in lower GPM, higher selling expenses and eff. tax rate. Our TP was lifted from HK$19.30 to HK$20.80, at 31.7x average FY21E and FY22E adj. EPS, as we rolled forward our valuation basis. Catalysts: M&A, student enrollment beats. Risk: lower-than-expected student enrollment.
