Yuhua Education announced share placement of 220m shares at HK$4.19 per share, which was discounted by 12% to the closing price of HK$4.76 on 26 October 2021. After the placement, total shares outstanding will be enlarged by 6.12%. We believe the fund will be used for followings: 1) Transformation of existing K9 schools to junior colleges needs to increase investment to set a foundation for future upgrades to vocational undergraduate schools; 2) Establish new campus for HIEU; 3) Invest to upgrade equipment for three application-oriented universities to apply vocational education majors.
Rising investment for future upgrades. Yuhua Education planned to build three junior colleges in Xingyang, Jiaozuo, and Luohe in June, which are all located in Henan Province. 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. According to the plan, enrolments of each junior colleges will eventually reach c.12,000 when fully operates. Application of three schools has been approved by municipal authorities and named by Zhengzhou Software Vocational and Technical College, Jiaozuo Vocational College of Tourism and Luohe Vocational College of Science and Technology. The application is currently under the review of provincial authorities. Besides, thanks to the “Opinions on Supporting the Development of Modern Vocational Education” issued on 12 October, vocational education is expected to get strong supported. Therefore, Yuhua Education decided to increase investment for building three junior colleges to establish a solid foundation for future upgrades. The company estimates that the investment will be c.Rmb600m per school, resulting the total investment to reach Rmb1.8-2bn.
Eye-catching IRR. According to the plan, once three junior colleges begin to recruit students, three K9 schools will cease operation. And we expect a total of c.36,000 enrolments of junior colleges will replace c.3,695 enrolments of K9 schools. Thanks to the operating leverage of higher education, the increase contribution from higher education will lead the margin to increase. Besides, we assume that the enrolment quotas will reach 5k, with a registration rate of 80%, for the fifth year of operation for each junior college. Thereby, we estimate the enrolments of each junior college may reach 11.8k. Combining total enrolments of three junior colleges with the estimated enrolments of higher education, we forecast the total enrolments of higher education sector may reach c.175k in FY26E, representing a five- year Cagr of 9.4%. In addition, the company plans to set the tuition to be Rmb12k for three junior colleges. And we believe that with the loosing pricing limit in Henan, the tuition is expected to get further increased, reaching c.Rmb16.7k for the fifth year of operation. Therefore, we estimate each junior college will achieve revenue of c.Rmb197m and net profit of c.Rmb63m for the fifth year of operation, representing net margin of 32%. And if 70% of initial investment will come from debt, we estimate the payback period of each junior college will be 5.07 years. And from a ten-year dimension, we estimate NPV will reach c.Rmb626m and IRR will be 22% for each junior college. Moreover, if three junior colleges operate ten years and fulfill the requirements for upgrading to undergraduate level, both tuition and enrolment quotas may further increase after the approval of upgrade, spiking the IRR as well.
Maintain BUY. We believe that the company will set a clear long-term growth track after proactive transformation from K9 to higher vocational education. Meanwhile, new campus of HIEU will create room for organic growth. As enrolments of newly established schools will have a climbing effect, we lower our estimation of adjusted net profit to be c.Rmb1.67bn and 1.87bn for FY22E and FY23E. And the placement will dilute the EPS, we thereby lower our EPS forecast from c.Rmb0.50 and c.Rmb0.56 to c.Rmb0.47 and c.0.52 for FY22E and FY23E. We lower target price to HK$9.50, and maintain BUY.
Risks: Approval for junior colleges may fall short of expectation; Enrolment of new schools may less than expected.