Higher education growth expected for FY22 from enrollment growth and margin upside, long awaited M&A opportunity a strong catalyst
Yuhua eyes conversion to vocational colleges to mitigate some of the K-9 earnings downside risk due to policy restrictions
BUY: Upward earnings revision factoring in K-9 schools to vocational colleges; TP nudged to HKD8.6
Higher education maintains solid growth outlook
We forecast Yuhua’s higher education segment to maintain solid growth of 12% CAGR in FY21-23E, driven by: 1) Organic enrollment growth supported by new Lankao campus expansion for Zhengzhou School; 2) Tuition fee increase amid policy tailwind; 3) Three new greenfield vocational colleges in Henan are expected to commence operation in 2022/23, though license application is still in-progress; 4) As of 1H21, Yuhua’s net cash was RMB1.1bn (excl. CB), plus tuition fee of RMB2.6bn to be collected in Sept 2021, well-prepared for new acquisitions.
K-9 to vocational conversion as a mitigant
The new version of the Implementation Rules for the Law on Promoting Private Education ( “新版《民促法实施条例》”) prohibited earnings distribution for compulsory education schools, thus earnings from K-9 might be excluded from Group consolidation, impacting c.8% of FY22E adj. NP, per our estimation . Yuhua is planning to convert three of its K-9 schools, located in Xingyang, Luohe and Jiaozuo, with a combined c.36k capacity with low utilization, to vocational colleges. Yuhua will suspend new enrollment for these schools starting this year. Upon a successful conversion next year, we estimate c.6k students to be enrolled for 2022/23, with tuition fee of c.RMB13k, total revenue could reach RMB78mn (3% of Group), helping segment revenue recover in FY23E after moderate decline in FY22E due to new enrollment termination. Yuhua’s remaining schools will continue to operate unchanged with the K-9 segment to adopt non-profit status.
BUY: Upbeat on higher education; Looking forward to M&A
Assuming successful conversion of the three K-9 campuses to vocational colleges, we lift FY21/22E core NP 2%/1.5%. For SOTP valuation, we maintained 21x next 12-mo P/E for higher education and 8x for K-12, while giving a 50% discount on K-12 segment due to the non-distributable K-9 earnings (K-9 accounts for c.50% of segment). We nudged TP to HKD8.6 from HKD8.4, maintain BUY. Our TP implies 19x/17x FY21/22E P/E. We see potential M&A to be key share price catalyst for Yuhua.