20201208-招银国际-中国东方教育-00667.HK-Profit_warning_due_to_COVID-19__expect_strong_rebound_in_FY21E_5页_889kb

Summary of China East Education (667 HK) Company Update

Core Content Overview

This document provides an equity research update on China East Education (667 HK), highlighting the company's financial performance, challenges, and outlook amidst the impact of the COVID-19 pandemic. It includes key financial figures, adjustments to forecasts, and strategic initiatives aimed at recovery and growth.

---

Main Points

Profit Warning and Performance Impact

• FY20E profit slump is primarily attributed to the impact of the pandemic, including:
  • 5-10% revenue decline (vs. -17% in 1H20)
  • 30-50% adjusted net profit (adj. NP) decline (vs. -48% in 1H20)
  • 50-70% net profit decline
• Reasons for the decline:
  • Delayed Zhongkao and Gaokao caused a postponement of student enrollments.
  • Extended marketing campaigns in 2H20 led to higher A&P expenses.
  • Unrealized exchange losses of around RMB150 million due to depreciation of HK$ deposits against RMB.

Recovery Outlook

• Adj. NP is expected to rebound by 106% YoY in FY21E, with a 31% increase compared to FY19 adj. NP.
• Revenue growth is forecasted to be 106% YoY in FY21E, driven by improved student enrollments and market conditions.
• Net profit margin is expected to rise from 9.7% in FY20E to 25.4% in FY22E, reflecting improved operational efficiency.

Target Price and Rating

• Target Price (TP) has been lowered to HK$19.30 from HK$19.60.
• Maintain Buy rating, based on a 31.7x FY21E P/E multiple, which is 15% below the average of education segment leaders.
• Catalysts for growth include M&A activities and student enrollment exceeding expectations.
• Risks include lower-than-expected student enrollment and continued pandemic disruptions.

---

Strategic Initiatives

Expansion in Secondary Vocational Education

• The company has secured more licenses for the Wontone brand in secondary vocational education.
• New majors related to urban rail transit have been added to diversify offerings.
• Wontone brand new student enrollment increased 15% YTD.
• Plans for FY21E:
  • Secure more licenses for New East and Xinhua Computer brands.
  • Expand the student base through these initiatives.

Network Expansion

• As of now, the company operates 200 schools, on track to meet its FY20E estimate.
• Chengdu beauty school has already exceeded its target of 400-500 students with 560 students.
• Two more beauty training schools are planned for Zhengzhou and Changsha in FY21E.

---

Financial Forecast and Key Ratios

Metric	FY18A	FY19A	FY20E	FY21E	FY22E
Revenues (RMB mn)	3,265	3,905	3,565	4,797	5,516
Net Profit (RMB mn)	515	848	346	1,116	1,404
Adj. Net Profit (RMB mn)	547	900	572	1,176	1,404
Adj. EPS (RMB)	0.314	0.411	0.261	0.537	0.641
Adj. P/E (x)	NA	37.6	59.3	28.8	24.2
Ex-net cash adj. P/E (x)	NA	30.7	48.7	23.0	18.7
Net Cash (RMB mn)	986	6,242	6,052	6,865	7,716

Key Financial Ratios

• Gross Profit Margin is expected to rise from 55.0% in FY20E to 60.4% in FY22E.
• EBIT Margin is projected to increase from 14.2% in FY20E to 32.6% in FY22E.
• Net Profit Margin is forecasted to improve from 9.7% in FY20E to 25.4% in FY22E.
• Adj. Net Profit Margin is expected to increase from 16.0% in FY20E to 25.4% in FY22E.

---

Shareholder and Market Information

• Shareholding Structure:
  • Wu Junbao holds 34.13% of the shares.
• Stock Data:
  • Market Cap: HK$38,432 million
  • Average 3-month turnover: HK$33.87 million
  • 52-week high/low: HK$20.30 / HK$10.62
  • Total issued shares: 2,190.9 million
• Share Performance:
  • 1-month: +12.6%
  • 3-month: +1.9%
  • 6-month: +15.6%

---

Key Ratios Summary

• Adj. ROAE (%): From 44.1% in FY18A to 18.1% in FY22E
• Adj. ROAA (%): From 14.1% in FY18A to 11.3% in FY22E
• Current Ratio (x): From 0.6 in FY18A to 2.6 in FY22E
• Net Cash (RMB mn): Increased from 986 million in FY18A to 7,716 million in FY22E

---

Conclusion

China East Education is expected to recover strongly in FY21E, with adjusted net profit rebounding by 106% YoY, despite a significant drop in FY20E due to the pandemic's impact. The company is on track to expand its network of schools and diversify its offerings through secondary vocational education. While revenue and net profit are forecasted to grow, the target price has been adjusted downward due to ongoing disruptions. The Buy rating is maintained, with strategic expansion and student enrollment performance serving as key catalysts for future growth.