20180910-招商证券_香港_-希望教育-01765.HK-Aiming_higher_40页_2mb

Hope Education (1765 HK) Summary

Core Content

Hope Education Group Co., Ltd. (HEG) is the second-largest private higher education provider in China, based on the number of students enrolled for higher education as of 31 December 2017, according to Frost & Sullivan Report. The company focuses on offering applied-technologies and professional-trainings to prepare students for employment.

Main Points

• Market Position: HEG is the second-largest private higher education group in China with a strong presence in Sichuan, Guizhou, and Shanxi.
• Educational Offerings: The group provides education and professional training through 8 higher education schools, including 3 independent colleges, 5 junior colleges, and 1 technical college.
• Student Enrollment: As of the 2017/18 school year, HEG had 73,573 full-time students enrolled at its higher education schools and an additional 12,925 students in other education services.
• Employment Rate: The initial employment rate for its existing schools (excluding Jinci College of Shanxi Medical University) was high, ranging from 87% to 99% in the 2016/17 school year.
• Growth Strategy: HEG is expanding its education network in regions with underserved demand, such as Sichuan, Guizhou, and Shanxi, and plans to acquire more schools to establish an elite school network nationwide.
• Financial Outlook: The company is expected to achieve a recurring net profit CAGR of 59% from FY17 to FY20E, outperforming its peers with an average CAGR of 32%.
• Valuation: The target price (TP) is set at HK$1.6, based on a 2019E P/E of 19.0x, which is considered attractive compared to the sector average of 0.7x PEG.

Key Information

• Target Price: HK$1.6 (implies 0.4x 2019E PEG, vs peers' average of 0.7x)
• Investment Thesis: BUY recommendation due to strong growth prospects and attractive valuation.
• Industry Trends: The private higher education industry in Sichuan, Guizhou, and Shanxi grew at a higher rate (8.4–12.5%) than the national average (8.2%) due to limited education resources in these provinces.
• Financial Performance:
  • Revenue: RMB 614 million in 2016, RMB 752 million in 2017, RMB 1,094 million in 2018E, RMB 1,346 million in 2019E, and RMB 1,635 million in 2020E.
  • Gross Profit: RMB 310 million in 2016, RMB 360 million in 2017, RMB 538 million in 2018E, RMB 694 million in 2019E, and RMB 883 million in 2020E.
  • Recurring Net Profit: RMB 157 million in 2017, RMB 341 million in 2018E, RMB 524 million in 2019E, and RMB 691 million in 2020E.
  • Recurring EPS (RMB): 0.03 in 2017, 0.05 in 2018E, 0.07 in 2019E, and 0.10 in 2020E.
  • Core P/E (x): 33.6 in 2016, 30.6 in 2017, 22.4 in 2018E, 14.6 in 2019E, and 11.0 in 2020E.
  • P/B (x): 11.4 in 2016, 8.2 in 2017, 1.5 in 2018E, 1.6 in 2019E, and 1.4 in 2020E.
  • ROE (%): 41.5 in 2016, 35.7 in 2017, 9.0 in 2018E, 11.1 in 2019E, and 13.7 in 2020E.
  • Net Debt/Equity (%): 271.6 in 2016, 342.5 in 2017, and Net Cash in 2018E and 2019E.
• Shareholding Structure:
  • Hope Education Investment LTD: 65.7%
  • Pearl Glory Global: 6.2%
  • Value Partners Group Ltd: 3.4%
  • Star Leap Ltd: 3.0%
  • No. of shares outstanding: 6,667 million
  • Free float: 1,881 million

Investment Highlights

• Market Demand: HEG's focus on practical courses and employment-oriented training aligns with the rising demand in the private higher education sector.
• Collaborations: HEG collaborates with over 500 enterprises and institutions to provide students with internships, training, and employment opportunities.
• School Enterprise Collaboration: The group has established numerous external training and employment bases, enhancing student preparedness for the workforce.
• Simulation Training: HEG invests in simulation training bases to provide hands-on experience in various fields, such as rail transportation and IT.
• Expansion Strategy: HEG plans to expand its network in regions with high school-age populations and underserved demand, as well as through acquisitions.

Risks

• Recruitment and Retention: Difficulty in attracting and retaining skilled teachers and management.
• Geographic Concentration: High concentration in Sichuan, which may pose regional risk.
• Policy Risks: Potential changes in education policies could impact operations.
• Financing Risks: Risks related to securing sufficient funding for expansion.
• Expansion Uncertainty: Uncertainty regarding the success of expansion into new regions.

Financial Analysis and Forecasts

• Recurring Net Profit Growth: Expected to grow at a CAGR of 59% from FY17 to FY20E, driven by school expansion and margin improvement.
• Earnings Growth: The recurring EPS is projected to increase from RMB 0.03 in 2017 to RMB 0.10 in 2020E.
• Valuation: The company's valuation is considered attractive with a P/E-based TP of HK$1.6, reflecting a 0.4x PEG compared to the sector average of 0.7x.

Industry Overview

• Private Higher Education: The demand for private higher education is rising in China, especially in regions with limited public resources.
• Market Growth: The private higher education industry in Sichuan, Guizhou, and Shanxi grew faster than the national average due to the lack of education resources in these provinces.
• Employment-Focused Programs: HEG's programs are designed to align with market needs and provide students with practical skills for employment.

Key Data

• 52-Week Range: HK$1.12–2.22
• Market Cap: HK$8,200 million
• Avg. Daily Volume: 40.23 million shares
• BVPS (RMB): 0.69 in 2018E
• Price (2018/09/07): HK$1.23
• 12-Month Target Price: HK$1.60 (+30.1%)

Conclusion

Hope Education Group is well-positioned to benefit from the rising demand for private higher education in China, particularly in regions with limited resources. Its strong growth in recurring earnings and attractive valuation support the BUY recommendation. However, the company faces key risks including geographic concentration, policy changes, and the challenges of expansion.