20210430-招银国际-希望教育-01765.HK-FY21E_guidance_maintained__more_catalysts_to_come_7页

Hope Education (1765 HK) Company Update Summary

Core Content

Hope Education (1765 HK) reported a 43% year-over-year growth in adjusted net profit (adj. NP) to RMB545mn in 1HFY21. The share price was volatile due to an RMB180mn reversal of impairment losses from the acquisition of Yichuan school. The Company maintains its FY21E adj. NP guidance of RMB800-850mn despite stricter expense control in 2HFY21E. The analyst has revised FY21-23E adj. NP estimates by 6-11% and reduced the target price (TP) from HK$3.88 to HK$3.54, based on a 21.0x FY22E P/E ratio and a 1x PEG.

Main Points

• 1HFY21 Performance:

  • Revenue increased by 36%, driven by 19% growth from organic business and the acquisition of Inti Education.
  • Gross profit margin widened by 1.7ppt to 54.2%.
  • Core operating profit increased by 45%.
  • Finance costs rose by 43% due to a RMB1bn loan increase.
  • Effective tax rate increased by 3.6ppt to 15.3%.
  • Net profit grew by 43% to RMB478mn, while adj. net profit rose to RMB547mn.

• Recent Acquisitions:

  • Inner Mongolia College: MOE approved the Company as sponsor in March 2021. The Company expects to consolidate its financial results once the operating permit is granted. The college reported RMB10mn NP in FY20, with a target of 86% CAGR for NP over 3 years.
  • Jinken Vocational College: The Company agreed to buy the college for RMB25mn. The acquisition is expected to generate synergy with Suzhou Top College in Jiangsu. The college reported RMB3mn NP in FY20, with a target of 156% NP growth over 3 years.
  • Shinawatra University: The acquisition was made for US$35mn, below replacement value, due to strong overseas study demand. The university reported RMB35mn revenue in FY20, with a target of RMB40mn NP in FY25E. Approval is still pending.

• Independent Colleges Conversion:

  • Management believes the four original independent colleges can be converted by 2021, which may enhance earnings and increase admission quotas.

• Estimate Adjustments:

  • The analyst lowered FY21-23E adj. NP estimates by 6-11% and reduced TP to HK$3.54, based on lower revenue and margin assumptions.

• Key Financial Metrics:

  • Revenue growth is expected to be 43% in FY21E, with a 13% CAGR in student enrollment from 2020/21 to 2022/23.
  • Gross margin is projected to increase to 54.0% in FY23E.
  • Adj. net profit margin is expected to decrease slightly in FY22E and FY23E.
  • The PEG ratio remains at 1x, indicating a potential value for the stock.

Key Information

• Target Price: HK$3.54 (Previous: HK$3.88)
• Current Price: HK$2.72
• Market Cap: HK$21,689 million
• Shareholding Structure: Credit Suisse Trust holds 57.86% of shares
• Share Performance:
  • 1-month: +2.3%
  • 3-month: +2.6%
  • 6-month: +44.7%
• Adj. EPS Growth: 25% in FY21E, 19% in FY22E, and 20% in FY23E
• Adj. Net Profit (RMB mn): 811 in FY21E, 1,010 in FY22E, and 1,209 in FY23E
• Adj. P/E (x): 21.1 in FY21E, 17.8 in FY22E, and 14.9 in FY23E
• Shareholder Loan: Used to offset outstanding payment from the acquisition of Yichuan school, indicating potential for recurring gains.
• Risks: Surge in operating and teachers' costs.

Summary Table

Analyst Recommendation

• Rating: BUY (Maintain)
• Reason: Despite revised estimates, the Company is expected to benefit from M&A activity, conversion of independent colleges, and removal of policy overhang.
• Catalysts:
  • M&A activity
  • Conversion of independent colleges
  • Policy overhang removal

Valuation Comparison

Key Ratios

• Gross Margin: 51.7% in FY21E, 53.5% in FY22E, 54.0% in FY23E
• EBIT Margin: 37.1% in FY21E, 40.4% in FY22E, 41.5% in FY23E
• Adj. Net Margin: 36.2% in FY21E, 32.1% in FY22E, 33.5% in FY23E
• Adj. ROAE: 11.9% in FY21E, 12.2% in FY22E, 13.4% in FY23E
• Current Ratio: 1.4 in FY21E, 1.4 in FY22E, 1.4 in FY23E
• Asset Turnover: 0.1 in FY21E, 0.2 in FY22E, 0.2 in FY23E

Summary

Hope Education (1765 HK) continues to show strong growth in revenue and adj. net profit, driven by acquisitions and organic expansion. The Company has revised its estimates for FY21-23E due to the impact of lower revenue and margin assumptions. The analyst maintains a BUY rating, with a reduced target price of HK$3.54, and highlights potential catalysts such as M&A activity, conversion of independent colleges, and policy changes. The Company's financial performance and growth prospects remain positive, although risks such as rising operating and teacher costs are noted.