CSCI-Education-China Education Group (839 HK) ：A solid set of FY18 results, maintains BUY - 20181128

A solid set of FY18 results, maintains BUY

• CEG reported a solid set of results for the Jan-Aug 2018 period, with adjusted attributable net profit of RMB441.9mn, along with margin expansion coming in ahead of our estimates.
• We reiterate our positive view on China’s private higher education sector on the back of its high visibility of strong growth and less regulatory uncertainties.
• FY19E/20E net profit estimates trimmed by -2.2/0.3% and DCF-based PT revised down to HKD15.0 (from HKD15.7). Reiterate BUY.

A robust set results with better-than-expected margin expansion. CEG reported its results for the eight months ended 31 Aug 2018. The company has changed its FY year-end from 31 Dec to 31 Aug to align with the academic year. Total revenue grew by 58.6% YoY to RMB932.9mn in 8M18, thanks to the consolidation of three newly acquired schools. Stripping off one-off items, adjusted attributable net profit reached RMB441.9mn for the period, slightly better than our estimate. GPM came in at 61.4%, up 4.4ppts compared to the same period in 2017. The decent margin expansion was mainly attributed to efficient cost controls.

Strong growth in SY18/19 student enrolments. For SY18/19, CEG recorded a total student enrolment of c.145,000, among which, Zhengzhou and Xi’an Schools posted c.14% and 40% growth as compared to SY17/18. And from our recent visit at Songtian University we saw significant improvement after CEG’s acquisition, with the enrolment plan increasing by over 50% in SY18/19.

Healthy financial position facilitating M&A-driven growth. As of 31 Aug, 2018, CEG was in a net cash position of RMB1,608mn. The abundant cash on hand and other funding sources (e.g. bank loans and industry fund) should enable CEG continue to pursue its acquisition strategy going forward, in our view. Besides, the two Songtian schools that have been expected to be consolidated into the group in Sep 2018 would become the primal new growth drivers in FY19E.

Reiterate our positive view on China’s private higher education sector. In our view, private higher education players are less exposed to the policy risks and restrictions relative to K12. According to the latest regulations, the government will increase public spending on preschool education to offer universal access to preschool education. On such basis, we see a rising importance of private higher education in mitigating a growing supply deficit of higher education in China.

Maintain BUY and revise PT to HKD15.0. We shifted our FY-end to Aug and trimmed our FY19E/20E earnings estimates by -2.2%/0.3% respectively, and generated a new DCF-based PT of HKD 15.0, implying 36.4% upside potential. CEG currently trades at FY19E PER of 21.9x, per our estimates.