Outlook 2019 Interim Results: The company will announce its FY2019 interim results as of February28, 2019 at the end of April. We expect FY2019H1 to record revenue of 760 million RMB, up 29%year-on-year; net profit will record 190 million RMB, up 31.1% year-on-year. The strong growth rateat the revenue side came from the acquisition of Zhangpu Longcheng, Weifang Weizhou School andGuang'an School, and the establishment of Dongguan Guangming School Campus to expandcapacity. Affected by the low profit margin of the acquired schools and the consolidation of someconstruction projects, we expect the company's gross profit margin to be 43.5%, down 70bpsyear-on-year, and the potential exchange gains during the period will lead us to predict a net interestrate of 25%. Increased by 40bps year-on-year.
The number of students continues to grow at a high rate, and the school has sufficient capacity: OnNovember 21, 2018, the company announced the acquisition of Zhapu Longcheng School. As of thatdate, the number of students in the company reached 54,420, an increase of 32.2% compared withSeptember 1, 2017. The student's organic growth rate reached 19.5%, maintaining a high growthrate. As of FY2019H1, the company's consolidated school capacity reached 63,000, and theutilization rate reached 86.4%. There is still room for improvement. FY2020 plans to open Yunfu andShunde schools, and the company's FY2020 total capacity is expected to increase to 128,000.
Set up an education industry fund to explore education investment opportunities in Dawan District: The company has jointly established a 2.5 billion RMB education industry fund with a term of 7 yearsin conjunction with the investment platform of Guangzhou Municipal Party Committee andMunicipal Government. The company plans to invest 700 million RMB. As a fund investor and schooladministrator, the company will enjoy the investment opportunities of the Dawan District SchoolProject brought by the fund manager Guangzhou Investment Platform, and the school managementfee income brought by the management fund investment school. When the fund withdraws fromthe school, the company also gives priority to the transfer of rights.
Maintain target price of HK$6 and “outperform” rating: FY2019H1's outsourcing of Weifang WeizhouSchool and Zhangpu Longcheng School will contribute to the increase in the current performance,and organic students will continue to maintain a high level of 19.5%. Laid the cornerstone for thecompany to maintain rapid growth. The Education Industry Fund established during the periodplayed a good role in boosting the company's construction in Dawan District. The company'sfundamentals are solid and stable, and the development benefits of the education industry fundremain to be seen. We maintain our earnings forecasts. We expect the company's revenue in FY2019-2021 to be 1.63, 2.03, and 2.57 billion RMB, up 30.7% year-on-year. 24.3% and 26.9%; corenet profit will be 420, 523, 666 million RMB, an increase of 30.2%, 24.8% and 27.2% respectively.
Maintain “outperform” rating and maintain target price of HK$6, corresponding to 25, 20 and 16times PE in 2019-2021.
Risk tips: unsatisfactory acquisition integration, changes in China's education policy; unsatisfactoryenrollment, company income comes from a few cities in China, VIE architecture policy risk.