Yuhua’s share price has been on a persistent decline since May with FY22E P/E de-rated to 6.4x from 15.2x
Issues related to its K-9 business have been well anticipated with moderate impact to its earnings/valuations
Yuhua’s current forward P/E similar to K-12 names; Reiterate BUY
Share price drop from K-9 and tutoring spillover unwarranted
Yuhua’s share price has declined from the peak in end-May of HKD8.2 to currently HKD3.5 (-58%), with FY22E P/E contracted from 15.2x to 6.4x, due to concerns on its K-9 schools. 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 K-9 compulsory education schools, thus Yuhua’s K-9 schools are likely to be unconsolidated by the Group, impacting c.8% of FY22E adj. NP which has been reiterated by management previously. On the other hand, Yuhua’s remaining schools (kindergartens and senior high schools) are not impacted and will continue to operate as usual with for-profit status. Yuhua also plans to convert three of its K-9 schools (located in Xingyang, Luohe and Jiaozuo, with a combined c.36k capacity), to vocational colleges.
Higher education solid outlook unchanged
We forecast Yuhua’s higher education segment to maintain solid growth of 10% CAGR in FY21-23E: 1) Organic enrollment growth supported by new Lankao campus expansion for Zhengzhou School; 2) Tuition fee increase; 3) 3 new greenfield vocational colleges in Henan are expected to commence operation in 2022/23, with license application in progress. 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 to reach RMB78mn (3% of Group).; 4) Exceptional balance sheet, net cash now likely over 3.7bn given 1H21 net cash RMB1.1bn (CB not counted as debt), plus RMB2.6bn tuition fee for 2021/22 school year.
Deep discounted valuation with stable outlook
Yuhua’s current valuation is similar to that of K-12 names which are significantly impacted by policy. We believe Yuhua’s persistent share price contraction is unwarranted, as policy still remains supportive for higher education. Reiterate BUY, lowered SOTP-TP to HKD6.7 from HKD8.6: 16x next 12-mo P/E for higher education (lowered from 21x due to sector de-rating, refer to historical avg. P/E +1SD) and 8x for senior high and Kindergarten segment (no valuation for K-9, unchanged). Our TP implies 14x/12x FY22/23E P/E.