CSCI-Education Services-China Maple Leaf Educational (1317 HK)：Strong growth momentum continues - 20171128

Strong growth momentum continues

• CMLE FY17 results were in line with our estimates, driven by strong student enrollment growth, hence greater benefits from economies of scale.
• Deferred revenue as the end of FY17 already grew 25.6% YoY, as the number of students enrolled as at Oct-17 grew 36.5% YoY. We expect its asset-light model in Shenzhen to materialize in 2018 the earliest, which could be potential catalyst.
• We upped our EPS estimates for FY18/19E by 5.9%/7.6% as we adjusted our margin assumptions upwards (see Figure 3). Hence, revise our DCF-based PT to HKD10.2 (prev. HKD7.9). We reiterate our BUY rating.

Target to add 12 new schools in FY18E. After adding 14 new schools in FY17, CMLE target to add another 12 new schools in FY18E (see Figure 2). Majority of these new schools will be pre-school, elementary and middle schools. The estimated total capacity is 7,135 students, representing an increase of c.17% YoY. Apart from the above, CMLE plans to revamp the existing campus in Wuhan as well as opening more asset light schools in China in Beijing and Shenzhen. The Shenzhen expansion is expected to materialize earliest by 2018/19 and Beijing by 2019/20.

Opening more pre-schools. As further to its feeder system, CMLE plans to add 1-2 pre-schools in its existing 18 cities each year. This will further solidify its student sources, ensuring the students’ English standard which is vital for feeding student sources from its elementary to high schools. At the end of FY17, CMLE operates a total of 16 pre-schools.

Limited rooms for tuition fee adjustment for AY17/18. Management indicated there is no direct tuition fee hike planning for AY17/18 given the tuition adjustment usually takes place every three years and its major schools in Wuhan, Dalian and Chongqing has raised tuition fees last year already. The average tuition fee per student for FY17 slipped 1.5% YoY to RMB38,600 per annum, due to greater proportion of new schools opening from middle and elementary schools and the contribution of Haikou schools which command a relatively lower tuition fee. We expect this trend to continue into AY17/18.

The revised education law. CMLE will opt for registering its pre-schools and high schools in 1^st – 2^nd tiers as profit-making under the revised education law. Although, effective tax rate might rise but CMLE has greater flexibility on tuition fee adjustment, which will more than offset the higher tax rate. Nevertheless, there is no conclusive treatment at present.

Reiterate BUY. We expect CMLE’s strong student growth momentum will continue into FY18E, driven by both organic and inorganic growth. Hence, we upped our EPS estimates for FY18/19E by 5.9%/7.6%. DCF-based PT is raised to HKD10.2 (prev. HKD7.9). Reiterate BUY. CMLE currently trades at 22.3x PER for FY18E.