CSCI-Education-China New Higher Education Group (2001 HK)：Robust external expansion remains unchanged - 20181108

Robust external expansion remains unchanged  

• China New Higher Education Group (CNHEG) terminated the proposed acquisition of Xinjiang School, which has little to do with industry policies and will have limited impact on its earnings, in our view.
• Having delivered a solid set of operational data in SY18/19, we believe CNHEG is well on tracking to achieving a 33.0% CAGR in earnings over the coming three years, taking into account consolidation of the newly acquired schools.
• We have revised down our FY18/19E EPS estimates by 1.0/2.1% respectively and derived our new DCF-based PT of HKD6.8, implying 49.8% upside. Maintain BUY.

Termination of Xinjiang School acquisition has little to do with industry policies. CNHEG has terminated the proposed acquisition of Xinjiang School as certain closing condition under the Equity Transfer Agreements not having been satisfied. After the termination, CNHEG may withdraw the listing investment of RMB56mn and apply such funds to other acquisitions in the future. We believe the decision to terminate the acquisition has nothing to do with the industry policies. Instead, CNHEG has recently completed the acquisition process of Guangxi School in Oct-2018.

Termination to have limited impacts on earnings, strong M&A pipeline. CNHEG has started to collect management service fees from Xinjiang School since FY18 and we expect the school will be consolidated in 2H19E. According to our estimates, the termination of acquisition of Xinjiang School will drag down the company’s attributable net profit by c.3%/4.5% in FY18E/19E. We expect that Henan and Northeast Schools will be consolidated since Jul-2018 whilst Guangxi and Central China Schools will be consolidated since Jan-2019. Leveraging on the newly consolidated schools, we estimate CNHEG’S earnings to grow at a 3-yr CAGR of 33.0% over FY17-20E.

Recent operational data meets expectation. CNHEG posted sound operational data for SY18/19 with student enrolment at its Yunnan, Guizhou, Central China and Northeast Schools reaching a total of 62,428, up 15% as compared to SY17/18, primarily driven by the growth of Yunnan School. And if Guangxi and Henan Schools were included, the total student enrolment of the six schools had in fact amounted to 93,548, with these six schools’ average tuition fee reaching RMB9,947, up 72% and 5% respectively versus SY17/18, in line with our estimates.   

Attractive valuation. We have revised down our FY18/19E earnings estimates by 1.0/2.1% to RMB307.5mn and RMB435.9mn respectively to factor in the acquisition termination and the slight revision in our total student enrolment estimates. Our DCF generated a new PT of HKD6.8 (Previous: HKD7.31), implying 49.8% potential upside. CNHEG trades at 18.6/13.1x FY18/19E PER respectively, which is undemanding considering its strong revenue and earnings growth visibility, in our view.