Hope Education (1765 HK) Summary
Core Content
Hope Education (1765 HK) is a Hong Kong-listed company operating in the Chinese education sector. The report outlines the company's financial performance, strategic expansion plans, and key risks.
Main Points
- Recurring Net Profit Guidance: Management maintains its guidance for recurring net profit at RMB356 million for 2018 and RMB560 million for 2019.
- Operating Margin Rebound: The company expects an improvement in operating margin in 2H18 and beyond due to the promotion of high-margin certificate courses and cost control measures.
- Expansion Strategy: Hope Education is focusing on establishing new schools and pursuing M&A opportunities. It is currently negotiating with a local government to set up a Chinese medicine junior college and is in talks with over 15 potential M&A projects, with 5 close to completion.
- M&A Targets: The company aims to acquire 1-2 schools in 4Q18 and 3-4 schools in 2019. The capex for M&A is guided at RMB200 million in 2018 and RMB300 million in 2019.
- Financial Impact of Revised Policy: The revised policy will require Hope Education to register as a for-profit school, leading to corporate tax and supplementary land premium payments. However, the financial impact is expected to be minimal, with an effective tax rate of around 8% and supplementary land premium of RMB280 million, depreciated over 50 years.
- Valuation: The company is trading at a 2019E PEG of 0.3x, based on a 2018-20E recurrent EPS CAGR of 42%, which is considered attractive compared to its peers.
- Investment Recommendation: The report maintains a BUY rating with a target price of HK$1.60.
Key Financials
| Metric |
2016 (RMB mn) |
2017 (RMB mn) |
2018E (RMB mn) |
2019E (RMB mn) |
2020E (RMB mn) |
| Revenue |
614 |
752 |
1,094 |
1,346 |
1,635 |
| Gross Profit |
310 |
360 |
538 |
694 |
883 |
| Recurring Net Profit |
157 |
173 |
341 |
524 |
691 |
| Core P/E (x) |
33.6 |
30.6 |
22.4 |
14.6 |
11.0 |
| P/B (x) |
11.4 |
8.2 |
1.5 |
1.6 |
1.4 |
| ROE (%) |
41.5 |
35.7 |
9.0 |
11.1 |
13.7 |
Key Risks
- Recruitment and Retention: Challenges in maintaining talent.
- Geographic Concentration: High reliance on Sichuan.
- Policy Risks: Changes in education regulations could impact operations.
- Financing Risks: Potential challenges in managing debt.
- Expansion Uncertainty: Success of new regions and M&A ventures may vary.
Shareholding Structure
| Shareholder |
% Ownership |
| Hope Education Investment LTD |
65.7% |
| Pearl Glory Global |
6.2% |
| Value Partners Group Ltd |
3.4% |
| Star Leap Ltd |
3.0% |
Financial Ratios
| Ratio |
2016 (%) |
2017 (%) |
2018E (%) |
2019E (%) |
2020E (%) |
| Gross Margin |
50.4 |
47.8 |
49.2 |
51.5 |
54.0 |
| EBITDA Margin |
54.6 |
58.4 |
57.8 |
58.5 |
59.2 |
| Net Margin (Core profit) |
25.6 |
23.0 |
31.1 |
38.9 |
42.3 |
| ROE (%) |
41.5 |
35.7 |
9.0 |
11.1 |
13.7 |
Cash Position and Financing
- Cash on Hand (2018E): RMB4.5 billion.
- Capital for M&A: After settling RMB1.5 billion in loans, the company still has RMB2.35 billion available for M&A.
- Gearing Ratio: Expected to be reduced to <40% in 2018 and maintained at <50%.
- Financing Cost: Expected to be subdued to 5.5% in 2018 and maintained at 5-5.5%.
Investment Ratings
| Rating |
Definition |
| OVERWEIGHT |
Sector is expected to outperform the market |
| NEUTRAL |
Sector is expected to perform in-line with the market |
| UNDERWEIGHT |
Sector is expected to underperform the market |
| Company Rating |
Definition |
| BUY |
Stock is expected to generate 10%+ return |
| NEUTRAL |
Stock is expected to generate +10% to -10% return |
| SELL |
Stock is expected to generate loss of 10%+ |
Conclusion
Hope Education is positioned for growth through its expansion strategy, which includes establishing new schools and pursuing M&A. Despite the challenges of policy changes and financial management, the company's financials and valuation suggest a positive outlook, with a maintained BUY rating and target price of HK$1.60. The company is expected to benefit from improved operating margins and cost efficiencies in the coming years.
