20201201-招银国际-希望教育-01765.HK-Strong_organic_growth_outlook_6页_856kb

Hope Education (1765 HK) Company Update Summary

Core Content

Hope Education (1765 HK) is a leading player in the Chinese education sector, with a strong outlook for organic and M&A-driven growth. The company has demonstrated robust performance, particularly in student enrollment growth and cost management, which has positively impacted its adjusted net profit and earnings per share (EPS).

Key Financial Highlights

• Revenue:

  • FY19A: RMB1,331 million
  • FY20A: RMB1,568 million (45% YoY growth)
  • FY21E: RMB2,468 million
  • FY22E: RMB3,095 million (25% YoY growth)
  • FY23E: RMB3,590 million (16% YoY growth)

• Adjusted Net Profit (Adj. NP):

  • FY19A: RMB474 million
  • FY20A: RMB576 million (61% YoY growth, in line with estimates)
  • FY21E: RMB859 million
  • FY22E: RMB1,127 million
  • FY23E: RMB1,352 million (19% increase from FY21E)

• Adjusted EPS:

  • FY19A: RMB0.071
  • FY20A: RMB0.086
  • FY21E: RMB0.119
  • FY22E: RMB0.156
  • FY23E: RMB0.187

• Adj. P/E Ratio:

  • FY19A: 27.7x
  • FY20A: 23.6x
  • FY21E: 16.6x
  • FY22E: 12.7x
  • FY23E: 10.5x

• Net Cash:

  • FY19A: RMB255 million
  • FY20A: RMB329 million
  • FY21E: RMB759 million
  • FY22E: RMB947 million
  • FY23E: RMB1,561 million

Main Points and Growth Drivers

• Strong Organic Growth:

  • Total student enrollment is expected to grow by 39% to 194,554 in FY21E.
  • Management targets a 15-20% revenue CAGR and a faster net profit CAGR over 3-5 years on an organic basis.

• M&A Growth:

  • The company has acquired a vocational college in Nanchang (2,753 students) in October.
  • Plans to open two vocational colleges each in FY22E and FY23E.
  • Conversion of four independent colleges is expected to increase FY23E net profit by 19%.

• Overseas Study Demand:

  • Enrollments in overseas programs have surged from 1,964 in FY19 to 17,315 in FY20.
  • These enrollments are expected to gradually convert into overseas students over 2-3 years.
  • Management targets a 40% net profit CAGR for the international education segment from 2018 to 2024E.

• Cost Management:

  • Adjusted gross margin improved to 52.4% in FY20, up 5.4ppt from FY19.
  • SG&A expenses ratio decreased by 3.3ppt to 16.4%.

• Dividend Policy:

  • The company declared a RMB0.8 cents dividend for the 8M20 period.
  • Payout ratio is expected to remain at 30% in the future.

Valuation and Investment Recommendation

• Target Price: HK$3.41 (up from previous HK$3.05)
• Current Price: HK$2.23
• Upside Potential: +53% from current price to target price
• CMBIS Rating: Buy
• Valuation Basis: 25.4x FY21E P/E, with a PEG of 1x

Risk Factors

• Potential surge in teachers' costs could impact profitability.
• The company is subject to market and policy risks in the education sector.

Comparison with Peers

• CAGR of Revenue:
  • Hope Education: 25.4% (FY21-23E)
  • Peers average: 22%
• Adj. EPS Growth:
  • Hope Education: 39% in FY21E, 31% in FY22E, 20% in FY23E
  • Peers: Lower growth in FY21E and FY22E
• Valuation:
  • Hope Education's P/E is lower than peers, indicating a more attractive valuation.

Share Performance

• Market Cap: HK$16,131 million
• Average 3-Month Trading Volume: HK$49.52 million
• 12-Month Price Performance:
  • Absolute: -19%
  • Relative: -30.8%

Shareholding Structure

• Credit Suisse Trust: 57.86% of shares

Key Ratios

• Gross Margin: Increased to 53.1% in FY21E
• Operating Margin: Improved to 40.4% in FY21E
• Net Margin: 34.8% in FY21E
• Adj. ROAE: 14.2% in FY21E
• Adj. ROAA: 6.2% in FY21E
• Payout Ratio: Maintained at 30%

Conclusion

Hope Education is well-positioned for continued growth through both organic expansion and strategic acquisitions. The company's strong execution capabilities and improved cost control have contributed to a significant increase in adjusted net profit and EPS growth. The investment recommendation remains Buy, with an updated target price of HK$3.41, reflecting the company's growth potential and favorable valuation. However, investors should be mindful of potential risks, including rising teacher costs and sector-specific challenges.