The impact of the acquisition on the performance increase continued, the interim results wereoutstanding, maintaining the target price of HK$6 and the “Outperform” rating: FY2019H1's interimresults beat our expectation, among which the acquisition of schools in Yuedong School andWeifang School has significantly increased the income, but the financial pressure is also looming. We believe that the increase in the financial expense ratio will have a certain negative impact on thecompany's long-term profit margin, but the short-term impact is not obvious. Based on the M&ASchool consolidation and tuition enhancement, we raise the forecasts of earning. We estimate thatthe company's revenue in FY 2019-2021 to be 1.66, 2.12, and 2.65 billion RMB, increasing by 33.4%,27.4%, and 24.9% respectively; core net profit will be 0.43, 0.53, and 0.67 billion RMB, increasing by33%, 24.6%, and 25.6% respectively. Maintain “Outperform” rating and target price of HK$6,corresponding to PE of 25, 20 and 16 times in FY 2019-2021 respectively.
The results beat expectations, tuition segment exceeded well, and the complementary service rampedup: FY2019H1 recorded an revenue of 836 million RMB, a year-on-year increase of 41.1%, exceedingour expectation of 9.4% of 764 million RMB. The sources of revenues beat expectations were tuitionfees and accommodation expenses, which accounting for 69.3%, a year-on-year increase of 38.8%;supporting services accounted for 30.7%, a year-on-year increase of 46.9%. Tuition andaccommodation fees are affected by both the increase in school utilization rate and the increase intuition fees. In the current fiscal year, the company upgraded fees of some of its primary andsecondary schools. It is expected that in FY2020, company will increase some high school fees inGuangdong. Complementary services will continue to maintain high growth rates, and it confirmsthe sustainable advantages of education companies providing supporting services to schools, whichis in line with the current policy of the regulatory ideas on the separation of education and services.
The annual capital expenditure is expected to remain stable, and cash can still support: by FY2019H1,company has 966 million RMB in cash and secured bank deposits, and its net debt afterinterest-bearing liabilities is 982 million RMB.
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.