CSCI-initiation-Education-China New Higher Education Group Limited (2001 HK)：Strong acquisitions-fuelled growth - 20180820

Strong acquisitions-fuelled growth

• We see another 3-5 years of boom period for the private higher education industry in China, in view of the increasing demand and capacity constraints in public higher education.
• On the back of the solid track record in M&As and organic expansion, we expect China New Higher Education Group (“CNHEG”) to post a robust 31% CAGR in earnings during FY17-FY20E. 
• We initiate coverage on CNHEG with a BUY rating and DCF-based PT of HKD6.80, implying 35.2% upside potential and FY18/19E 27.2/20.4x PER and 0.78x PEG.

Positive on China’s private higher education under the latest regulations. From the latest version of the Implementation Rules for the Law for Promoting Private Education of the PRC (the Draft Revision), we do not see any material negative impact on the private education industry. On the other hand, we see more M&A potentials in the private higher education market as the disposals of independent colleges by public schools may accelerate under the new regulations. Compared to K12, we prefer private higher education, which can choose for-profit, with more flexibility and less policy risks.

A leading brand with strong track record in M&As, more ahead. CNHEG is one of the leading private higher education providers in China. Through actively engaging in M&As, CNHEG’s total student enrolment reached 76,279 in SY17/18. CNHEG has acquired five schools since 2015, through which it forayed into the private higher education markets in Western, Central and Northeastern China, which though are relatively less-developed but offer high growth potential. Whilst the private higher education market in China is highly fragmented with high entry barriers, we believe CHNEG is poised to continue to acquire high-quality targets like independent colleges that have become vastly available in the market over the years, leveraging on its large brand power and scalable business, to further cement its market leading position. 

High visibility of earnings growth, on organic and M&A. We anticipate the company to achieve a net profit of RMB315/419mn in FY18/19E, respectively, representing more than a 30% YoY growth, driven by 1) the growing student enrolment at its Yunnan School and Guizhou School both of which posted c.10% YoY growth in SY18/19E; 2) rising tuition fees; and 3) consolidation of the four newly acquired schools based on our estimates of the consolidation progress and efficiency improvement post acquisitions. 

Valuation. Our DCF model generated the PT of HKD6.80. CNHEG currently trades at FY18E/19E PER of 20.1/15.1x. In our view, the recent correction in the company’s share prices provides a good entry opportunity given its strong long-term growth prospects.

Key investment risks. Major risks could lie with the lower-than-expected consolidations of the newly acquired schools and unfavourable changes in the regulatory environment.