Yuhua Education plans to build three junior colleges in Xingyang, Jiaozuo, and Luohe, which are all located in Henan Province. All three schools are submitting applications by the end of June for the approval from provincial educational authorities. We expect those three junior colleges will start enrolling students within 2 years. Besides, three junior colleges will use the campus of elementary and middle schools of Yuhua Education as colleges’ campus.
Transformation to higher education. The campus of three junior colleges will be entirely based on the existing campuses of elementary school in Xingyang, elementary and middle schools in Jiaozuo and Luohe, whose capacity is approximately 4,800, 5,000 and 6,000, respectively. Therefore, few capital expenditures are required for first recruitment year for three colleges in FY23E. According to the plan, enrolments of each junior colleges will eventually reach c.12,000 when fully operates. And we expect a total of c.36,000 enrolments of junior colleges will replace c.3,695 enrolments of compulsory education schools (Xingyang: middle school - 956 students; Jiaozuo: middle school - 750 students, elementary school - 635 students; Luohe: middle school - 685 students, elementary school - 668 students) to further increase the proportion of college enrolment for Yuhua Education.
Based on the assumption of full capacity in four years, we estimate the enrolments of higher education will reach c.174k in FY26E, representing a five-year Cagr of 9.4% from FY21E to FY25E, up 5 ppts from our previous expectation. We also assume the average tuition of three junior colleges to be c.Rmb13,000 according to the current pricing level of Junior College of Zhengzhou Technology and Business, representing a 35% discount to tuition of c.Rmb20,000 for K12 schools. Hence, we estimate revenue will rise by c.Rmb394m in FY26E. Thanks to the operating leverage, higher education has higher operating margins than compulsory schools. The increase contribution from higher education will lead the margin to increase.
Minimizing policy risk. As “Implementation of the law for promotion for private-run school” banning related party transaction for compulsory education, profits may not be distributed to shareholders for compulsory education schools easily. The risk will be lowered as proportion of gains from compulsory education decrease. The establishment of junior college for replacing the K9 schools will alleviate such risk. We estimate the operating profit contributed from K9 schools will decrease to c.6% in FY26, as three junior colleges fully operate.
Maintain BUY. We believe that the company will set a clear long-term growth track after proactive transformation from K12 to junior colleges. Meanwhile, Yuhua Education continues its solid track record of operation optimization of acquired schools. Therefore, we maintain adjusted net profit forecast of Rmb1.45bn for FY21E (+39% YoY), of Rmb1.69bn for FY22E (+16% YoY) and of Rmb1.87bn for FY23E (+11% YoY). And we also maintain our EPS forecasts of Rmb0.43 for FY21E, of Rmb0.50 for FY22E and Rmb0.56 for FY23E. We remain target price at HK$10.60, with 40% upside, we maintain BUY.