20171122-广发证券_香港_-睿见教育-06068.HK-Accelerating_expansion_in_Guangdong_to_better_leverage_brand_equity_7页_482kb

Wisdom Education (6068 HK) Summary

Core Content

Wisdom Education is a Chinese education service provider that has shown strong growth in its financial performance and expansion strategy. The company is currently rated as a Buy, with a target price of HK$5.70, based on a 1.1x PEG and a 24.7x FY19E P/E. The report highlights the company's financial results, expansion plans, and valuation metrics.

Main Points

Financial Performance (FY17)

• Revenue increased by 40% YoY to Rmb979m, driven by a 105% growth in ancillary services and 22% growth in tuition and boarding fees.
• Average tuition fees rose by 6% to Rmb21,114 per student.
• Student enrollment increased by 15% to 31,788.
• Net profit rose by 30% YoY to Rmb200m, with adjusted net profit up by 34% YoY to Rmb249m.
• Gross margin decreased by 1.2pp to 45.9%, mainly due to a higher proportion of low-margin ancillary services.
• Operating margin dropped by 2.0pp to 29.8%.
• Effective tax rate increased to 25.9%, attributed to unrealized exchange losses and share-based payments.
• Payout ratio was 41%.
• Net cash was Rmb139m as of Aug 31, 2017.

Expansion Strategy

• The company plans to accelerate expansion in Guangdong, with a new project and acquisition expected in FY18.
• Expansion within the home province is easier than cross-region expansion, allowing better leverage of brand equity in Dongguan and Huizhou.
• Jieyang school, acquired recently, is expected to increase its capacity to 6,000-7,000 in FY19, with a 90% utilization rate in FY18.

Outlook

• Guang'an and Yunfu schools are expected to begin operations in FY19.
• The company aims to open two or more new schools each year in Guangdong.
• Utilization rate is projected to remain high, with an expected student enrollment growth of 29.5% in FY18 to 41,180 students.

Risks

• Teacher costs may surge.
• Policy risks in the education sector.
• Oversupply of private schools could affect market share.
• Poor academic results may impact reputation.
• Over 75% of income comes from three schools in Dongguan, creating a concentration risk.

Key Financial Metrics

Stock Valuation (as of Aug 31)

Valuation Comparison with Peers

Key Assumptions

DCF Analysis

Financial Statements (as of Aug 31)

Income Statement

Balance Sheet

Cash Flow Statement

Catalysts

• M&A activity in FY18.
• Inclusion in Shenzhen-HK Stock Connect list.

Conclusion

Wisdom Education is a growing education provider with a strong expansion strategy in Guangdong. Despite some challenges in financial performance, the company is expected to continue its growth trajectory, with a focus on increasing ancillary services and leveraging brand equity. The stock is valued at HK$5.70, based on a 24.7x P/E for FY19. The report outlines several risks, including rising teacher costs, policy changes, and overcapacity in the private education sector.