20171115-广发证券_香港_-2018_Consumer_Discretionary_Sector_Outlook_Two-child_policy_to_drive_juvenile_industry__education_sector_boosted_by_strong_demand_and_industry_consolidation_18页_1mb

2018 Consumer Discretionary Sector Outlook Summary

Core Content

This report provides an outlook on the Consumer Discretionary Sector in China, with a focus on the Juvenile Products and Education sectors. It outlines the potential growth, market trends, valuation analysis, and investment opportunities in these areas, based on policy changes, market dynamics, and financial performance of key players.

Main Points

Juvenile Products Sector

• Two-child policy impact: The implementation of the two-child policy in 2015 led to a 12% YoY increase in newborns in 2016 and an 8% YoY increase in 2017. The proportion of second or more children increased to 58% in 2017.
• Policy outlook: The birth-control regime was not explicitly mentioned in the 19th CPC National Congress report, indicating a potential for further policy easing.
• Market growth: The maternity, baby, and children's (MBC) product industry is expected to grow at a 15.2% CAGR from 2016 to 2021, with non-durable MBC products growing faster than durable ones at 15.3% CAGR vs 14.0% CAGR.
• Market size: China is projected to become the largest market for MBC products globally by 2021, with retail sales value reaching US$112.1bn.
• Non-durable market dominance: The non-durable MBC market is about ten times larger than the durable market in China.
• Valuation: Goodbaby International (1086 HK) is trading at 13.8x 1-year forward P/E, below its 3-year historical average of 17.2x, suggesting it is undervalued.

Education Sector

• Private school growth: Private schools are expected to gain market share, with student enrollment in private primary and secondary education growing at a 4.7% CAGR to 18.5m students in 2020.
• Market fragmentation: The education sector is fragmented, creating opportunities for industry consolidation.
• Government support: The government encourages innovative ownership structures and broadening fundraising channels for private schools.
• Valuation trends: Maple Leaf (1317 HK) and Wisdom Education (6068 HK) are trading below the sector's weighted average P/E of 30.9x/22.7x, indicating potential for valuation increases.
• Key drivers: Rising middle-class income and a preference for well-rounded education over exam-focused education are key factors driving demand for private schools.

Investment Strategy

• A bottom-up approach is recommended, focusing on companies with re-rating potential due to accelerating earnings growth and attractive valuations.

Top Picks

Wisdom Education (6068 HK)

• Rating: Buy (maintained)
• Target Price: HK$5.90
• Reasons:
  • Expanding its school network in the Guangdong-Hong Kong-Macau Bay Area.
  • Leveraging the brand equity of its Dongguan Guangming School and Huizhou Gunagzheng School.
  • Strong academic performance, with 23.2% of graduates admitted to first-class universities in China, higher than the provincial average.
  • Excellent track record in M&A and replication of successful schools.
  • Expected 3-year EPS CAGR of 23.1% from FY18 to FY20.
• Potential catalyst: Inclusion in the Shenzhen-HK Stock Connect list.

Goodbaby International (1086 HK)

• Rating: Buy
• Reasons:
  • Acquired non-durable MBC product businesses and sales platforms from Goodbaby China, increasing exposure to the Chinese market.
  • The non-durable MBC market is ten times larger than the durable one.
  • Trading at 12.8x FY18 P/E, below its historical average of 17.2x, indicating undervaluation.
• Potential catalyst: Inclusion in the Shenzhen-HK Stock Connect list.

Risks

Upside Risks

• Better-than-expected student enrollment numbers.
• Better-than-expected revenue growth.

Downside Risks

• Teacher cost pressure.
• Policy risks.
• Fierce competition.

Key Financial Data

• Goodbaby International (1086 HK):

  • FY18 P/E: 12.8x
  • Historical P/E average: 17.2x
  • Valuation is seen as attractive.

• Maple Leaf (1317 HK):

  • FY18 P/E: 20.9x
  • Historical average: 15.0x
  • Historical high: 28x
  • Valuation is seen as attractive.

• Wisdom Education (6068 HK):

  • FY18 P/E: 25.8x
  • Historical average: 16.1x
  • Historical high: 26x
  • Valuation is seen as attractive.

Conclusion

The Consumer Discretionary Sector in China is poised for growth, particularly in the Juvenile Products and Education sectors. The two-child policy and rising middle-class income are key drivers of demand, with Goodbaby International and Wisdom Education identified as top picks due to their growth potential and attractive valuations. However, policy risks, teacher cost pressures, and intense competition remain key challenges.