20210201-招银国际-希望教育-01765.HK-Several_positive_catalysts_in_1-2_years_5页_744kb

Hope Education (1765 HK) Summary

Core Content

Hope Education is a Chinese education sector company that has been identified by CMB International Securities as a BUY recommendation with a Target Price (TP) raised from HK$3.41 to HK$3.61. The report highlights several positive catalysts expected to drive growth over the next 1-2 years, including the conversion of independent colleges, M&A activities, and the removal of policy overhangs. These catalysts are anticipated to significantly enhance the company's earnings and profitability.

Main Viewpoints

• Positive Catalysts: The company is on track to complete the conversion of its four independent colleges by 2021, earlier than the previous expectation of 2 per year. This is expected to have a significant earnings impact.
• M&A Strategy: The company plans to acquire three domestic universities and two vocational colleges within 1-2 years, using its RMB3bn cash reserves and potential onshore and offshore loans.
• Student Growth: The company has a strong overseas study demand and expects to admit 30,000 students in the 2021-22 school year, up from 18,000 in 2020-21. This is projected to increase the student enrollment by 9% CAGR from 2020/21 to 2022/23.
• Operational Expansion: The company will start operating four vocational colleges in the 2021-22 school year, with the Gansu and Hebei colleges beginning in September 2021 and Jiangxi and Chongqing colleges in March 2022.
• Earnings Outlook: CMBIS forecasts an EPS CAGR of 25.4% for FY21-23E. If the catalysts materialize, the growth could be even stronger.
• Valuation: The current TP is based on a 25.4x FY21E P/E ratio, which is still considered 1x PEG. The Adj. P/E is expected to decline over time, indicating improving earnings relative to valuation.
• Risks: The report identifies rising teacher costs as a potential risk that could impact margins.

Key Information

• Earnings Growth:
  • Adj. Net Profit is expected to grow from RMB576 million (FY20A) to RMB1,352 million (FY23E), with an Adj. EPS CAGR of 25.4%.
  • Adj. EPS is projected to be RMB0.119 (FY21E), RMB0.156 (FY22E), and RMB0.187 (FY23E).
• Revenue Growth:
  • Revenue is expected to increase from RMB1,568 million (FY20A) to RMB3,590 million (FY23E), with a CAGR of 57% in FY21E and a 25% growth in FY22E.
• Cash Flow:
  • Net cash is expected to rise from RMB759 million (FY21E) to RMB1,561 million (FY23E).
• Payout Ratio:
  • The payout ratio remains relatively stable at 32% for FY21E-FY23E.
• Margin Trends:
  • Gross profit margin is expected to increase from 53.1% (FY21E) to 55.3% (FY23E).
  • Operating margin is projected to rise from 40.4% (FY21E) to 43.5% (FY23E).
  • Net margin is forecasted to increase from 34.8% (FY21E) to 37.7% (FY23E).
• ROAE and ROAA:
  • Adj. ROAE is expected to rise from 14.2% (FY21E) to 17.7% (FY23E).
  • Adj. ROAA is projected to increase from 6.2% (FY21E) to 8.2% (FY23E).

Financial Highlights

Shareholder Structure and Performance

• Shareholding Structure:
  • Credit Suisse Trust holds 57.86% of the shares.
• Stock Performance:
  • 1-month return: 32.2% (Absolute), 21.8% (Relative)
  • 3-month return: 41.3% (Absolute), 22.3% (Relative)
  • 6-month return: 3.5% (Absolute), -10.2% (Relative)

Peer Comparison

Conclusion

Hope Education is positioned for strong growth due to its conversion of independent colleges, M&A pipeline, and expansion into vocational colleges. The company has a solid financial position, with significant cash reserves and improving margins. The Buy recommendation is based on the 25.4x FY21E P/E valuation, which is still considered 1x PEG, suggesting potential for value appreciation. Investors are advised to consider diversification and consult with financial advisors due to the risks associated with teacher costs and market volatility.