20171122-招商证券_香港_-睿见教育-06068.HK-Catalysts_still_outweigh_risks,_maintain_BUY_13页_873kb

Wisdom Education (6068 HK) Summary

Core Content

Wisdom Education (6068 HK) is a leading education company in China, with a strong performance in recurring earnings and student enrollment. The report highlights the company's continued growth, positive catalysts, and the adjustment of target price despite no longer being considered undervalued.

Main Points

• Recurring Earnings Growth:

  • FY17 recurring earnings increased by 32% YoY to RMB237mn, above the market consensus by 4%.
  • The company expects a 38% YoY growth in recurring earnings for FY18E and a 29% YoY growth for FY19E.
  • The growth is driven by student enrollment increases, especially from the newly acquired Jieyang School, and a lower effective tax rate due to policy changes.

• Revenue Growth:

  • FY17 revenue rose by 39.7% YoY to RMB979mn, driven by a 22% increase in tuition fees and a 104.5% increase in ancillary services.
  • Revenue is forecasted to grow by 27.3% in FY18E and 20.9% in FY19E.

• Student Enrollment:

  • FY17 student enrollment reached 31,788, with a 15% YoY increase.
  • The company anticipates a 30% YoY increase in student enrollment for FY18E to 41,180, and a 14% YoY increase for FY19E to 47,142.

• Earnings Per Share (EPS):

  • FY17 recurring EPS was RMB0.13, and the company expects it to rise to RMB0.16 in FY18E and RMB0.21 in FY19E, in line with market consensus.

• Price Targets and Performance:

  • The target price (TP) was upgraded to HK$5.11, a 10% increase from the previous HK$4.63.
  • The 12-month target price is based on the average 1-year forward P/E of listed school operators.
  • The stock has shown strong performance, with a 165.3% increase over the past 12 months.

• Financials:

  • The company's balance sheet improved, with a net cash position of RMB132mn in FY17 compared to net debt of RMB504mn in FY16.
  • Operating cash flow increased to RMB393mn in FY17, while investing cash flow turned to a net cash outflow of RMB467mn due to higher capital expenditures.
  • Financing cash flow turned to a net inflow of RMB374mn in FY17, mainly due to the proceeds from the IPO.

Key Information

• Stock Performance:

  • 6068 HK has shown a 6.8% increase in the last month, 81.9% over six months, and 165.3% over 12 months.
  • The Hang Seng Index (HSI) has seen a 2.7%, 16.2%, and 31.0% increase over the same periods.

• Market Cap and Share Structure:

  • Market cap is HK$9,441mn, with an average daily volume of 5.75mn shares.
  • Liu Xuebin holds 45.65% of the shares, and Li Suwen holds 27.98%.
  • The free float is 26%.

• Financial Ratios:

  • P/E (recurring) for FY17 is 30.2x, with a forecast of 24.5x for FY18E and 19.0x for FY19E.
  • P/B (recurring) decreased to 5.1x in FY17.
  • ROAE (return on average equity) is expected to rise to 18.5% in FY19E.

• Catalysts:

  • The company is maintaining a BUY rating due to positive catalysts such as acquisitions and entry into the SZ-HK stock connect in early 2018.
  • The transition from for-profit to non-profit schools is expected to lower the effective tax rate, thus boosting earnings.

Figures and Breakdowns

• Tuition Revenue Contribution by Schools:

  • Dongguan Guangming Secondary School contributes the most, with a 37% share in FY17, decreasing to 30% in FY18E.
  • Jieyang School is expected to contribute 5% in FY18E and 6% in FY19E.

• Student Breakdown by Types:

  • High school students account for 24.3% of total students in FY17, with an expected 22.5% in FY18E.
  • Middle school students make up 39.4% of total students in FY17, increasing to 43.4% in FY18E.
  • Primary school students represent 35.2% of total students in FY17, increasing to 33.3% in FY18E.
  • International program students account for 1.1% of total students in FY17, decreasing to 0.8% in FY18E.

• Revenue Breakdown by Business Segment:

  • Tuition fees make up 69% of total revenue in FY17, decreasing slightly to 72% in FY18E.
  • Ancillary services account for 31% of total revenue in FY17, decreasing to 28% in FY18E.

• Gross Margin and Operating Margin:

  • GPM decreased by 1.2ppts YoY to 45.9% in FY17, but is expected to remain stable in FY18E.
  • OPM increased slightly by 0.4ppts YoY to 32.5% in FY17 and is forecasted to rise to 31.8% in FY18E.

• School Capacity and Utilization Rates:

  • Total capacity for existing schools was 33,152 in FY17, with an 83.7% utilization rate.
  • Dongguan Guangming Secondary School has a utilization rate of 95.9% in FY17.
  • Dongguan Guangzheng Preparatory School has a high utilization rate of 91.6% in FY17.

Conclusion

Wisdom Education continues to show strong financial performance and growth potential, supported by increasing student enrollment and positive catalysts. The company's transition to non-profit schools is expected to reduce the effective tax rate, further enhancing earnings. Despite no longer being undervalued, the BUY rating remains due to the company's solid outlook and potential for future growth.