20170515-招商证券_香港_-睿见教育-06068.HK-Unlocking_value_as_leading_laggard_on_dampening_fears_28页_1mb_1mb

Wisdom Education (6068 HK) Summary

Core Content

Wisdom Education is identified as South China's largest private K-12 school operator, with a market share of 2.8% in terms of student enrollment as of 1 Sep 2015. The company operates premium primary and secondary schools and is well-regarded for its high-quality PRC curriculum, evidenced by the academic performance of its students.

Main Points

• Market Leadership: Wisdom holds the largest market share in South China's private education sector, with a strong reputation due to its academic performance.
• Academic Performance: 95% of Wisdom's graduates are admitted to Chinese universities, and 23% are admitted to first-class universities, which is significantly higher than the provincial rate of 10% in Guangdong.
• Growth Strategy: The company is expanding its school network through the development of new schools and expansion of existing ones, aiming to increase student enrollment and revenue.
• Earnings Growth: The report forecasts a 25% recurring earnings CAGR from FY16 to FY19E, driven by a 23% revenue CAGR, with ancillary services contributing significantly to revenue growth.
• Tax Rate Impact: The new education policy, effective from Sep 2017, reclassifies primary and middle schools as non-profit, reducing the effective tax rate from 25% to 15% starting FY18E, which is expected to boost earnings.
• Investment Recommendation: The report initiates a BUY rating with a target price of HK$3.39, based on a 20x FY18E P/E, in line with Maple Leaf's current P/E ratio.

Key Financial Forecasts

Investment Thesis

• Growth Drivers: The company's growth is driven by increasing student enrollment, expansion of existing schools, and the introduction of new ancillary services.
• Recurring Earnings: Expected to grow at a 25% CAGR from FY16 to FY19E, with a significant jump in ancillary services revenue in FY17E.
• Tax Rate Impact: The reclassification of schools under the new policy will reduce the effective tax rate, thereby boosting net profit and EPS.
• Sector Outlook: The report anticipates continued re-rating of the education sector, with Maple Leaf as the sector leader and Wisdom as the leading laggard.

Key Risks

• Concentration Risk: The majority of the company's schools are located in Guangdong, specifically in Dongguan.
• Policy Risk: There may be potential negative surprises from future education policies.
• Expansion Risk: The success of expanding into new cities is not guaranteed, although the company has a conservative expansion plan and has shown promising results in new cities like Huizhou and Panjin.

Valuation and Performance

• Target Price: HK$3.39, representing a 25% potential upside from the current price of HK$2.72.
• Sector Comparison: Wisdom's valuation is in line with Maple Leaf's current P/E ratio, suggesting potential for further upside.
• Price Performance: Over the past 12 months, Wisdom has seen a 41.1% increase in price, outperforming the Hang Seng Index (HSI) which rose by 25.3%.

Business Strengths

• Market Leadership: Wisdom is the largest private K-12 school operator in South China.
• Academic Reputation: Strong academic performance has built a solid reputation.
• Curriculum Offering: Offers a complete curriculum across primary, middle, and high school levels, which helps in retaining students and ensuring a stable student pipeline.

Strategic Considerations

• Expansion Strategy: The company plans to open three new schools in the next two years, with a focus on primary and middle schools.
• Teacher Quality: High-quality teachers are attracted due to competitive salaries and are often transferred from existing campuses to ensure consistent education quality.
• Residential Integration: New schools are often linked to residential projects, which serves as a source of new students.

Conclusion

Wisdom Education is positioned as a strong player in the South China private education sector, with a clear growth strategy and potential for earnings growth due to policy changes. The company's strong academic reputation and complete curriculum offering support its market leadership and growth prospects. Despite the risks associated with concentration and policy, the report remains optimistic about the company's future performance and recommends a BUY rating.