We joined the Company’s Investor Day on 6 Jan. We are positive on outlook as personnel training programs, IT systems and incentives scheme are in place to support further expansion (organic and M&A). Exam reform could also increase demand for Chinese tutorials. We lifted TP to HK$5.16 as we raised FY19-21E adj. net profit estimates by 5-16% and target P/E to 18.7x.
Business strategies. Beststudy outlined three key strategies: (1) Further penetrate the Greater Bay Area and expand regional network coverage. (2) Optimize product portfolio to maintain its niche in Chinese tutorials. (3) Establish ecosystem to provide one-stop services for kid’s development and develop quality education business (self-operating and investment).Beststudy has established solid teachers and management personnel training programs and IT systems (易、智、云大平台﹕sales & operation system, E-education system, back office systems) to expand its businesses.
Improving performance in Shenzhen. Student enrollment has picked up since Beststudy appointed its Marketing Director as the Head of Shenzhen branch and the grant of restricted shares in 2H19. Besides Guangzhou (accounts for ~80% of revenue), management sees Shenzhen (accounts for 4-5% of revenue) as another key market in the Greater Bay Area (both cities had 2mn K12 students in 2018). The Company plans to add 6-10 new learning centers in Shenzhen each year in coming 2-3 years. We think Shenzhen could become a key growth driver.
Accelerate M&A. The Company is looking for targets that have good synergies and are located in southern, eastern and southwestern region to accelerate its expansion. In the past, the Company had successfully established its presences in Shanghai, Jiangsu and Zhuhai through acquisitions and more than doubled its revenue in these cities since then.
Exam reform is positive. MOE stated it will cancel the exam outlines (考试 大纲) of Zhongkao (beginning 2021) and Gaokao (by 2022). This will increase the difficulty of the exams because students should study the whole syllabus instead of the outlines. We expect Beststudy should benefit from the increase of demand for Chinese tutorials (contributes around 30% of total revenue) given its strong brand name in Chinese tutorials.
Lower tax rate. A subsidiary has been approved as a high-tech enterprise so its tax rate could lower from 25% to 15%. We lower our effective tax rate estimates from 17% to 15% in FY19-21E.
Maintain Buy. We lifted FY19/20/21E adj. net profit estimates by 16%/5%/6% to reflect better student enrollment and lower effective tax rate. Our TP is raised from HK$3.41 to HK$5.16, representing 18.7x FY20E P/E (vs 13x previously) as we changed our valuation benchmark to K12 after school tutoring peers (40% discount to peers’ average 31.2x FY20E P/E) from education sector. Current valuation is undemanding compared to 32% adj. EPS CAGR from FY19E to FY21E. Catalysts: (1) better-than-expected student enrollment; (2) M&A. Risks: (1) fierce competition; (2) teacher cost pressure; (3) government policies.