摩根士丹利-中国-教育行业-中国教育：对经营者更具选择性-2019.5.23-91页 (2).pdf

May 23,2019 09:00 PM GMTSheng.ZElsie.SAttractiveMORGAN STANLEY ASIA LIMITED+Sheng ZhongEQUITY ANALYST+852 2239-7821Elsie ShengEQUITY ANALYST+852 3963-0475China EducationAsia PacificIndustryViewWhats ChangedFROMTOChina Maple Leaf Educational Systems Ltd(1317.HK)RatingUnderweightEqual-weightBright Scholar Education Holdings Ltd(BEDU.N)RatingEqual-weightUnderweightPrice TargetUS$10.50US$9.00RYB Education Inc(RYB.N)RatingEqual-weightUnderweightPrice TargetUS$8.50US$6.50China Education Group Holdings Ltd(0839.HK)Price TargetHK$0.00HK$14.90RatingNAOverweightYuhua Education(6169.HK)Price TargetHK$0.00HK$4.10RatingNAOverweightChina New Higher Education Group Ltd(2001.HK)Price TargetHK$0.00HK$3.80RatingNAOverweightWisdom Education(6068.HK)Price TargetHK$0.00HK$4.10RatingNAEqual-weightChina EducationChina Education|Asia Pacific Asia PacificBe Selective on SchoolOperators;Initiate on CEG andYuhua at OWWe prefer higher education,where program quality,operations,and location will be key differentiators amidregulatory change,as for-profit registration unfolds.We arecautious on K-12,given regulatory risk.CEG and Yuhua are ourtop picks.Industry structural trends favor higher education over K12:We believe thehigher education space is more favorable for school operators than K12,given:(1)population and enrollment trends,(2)private schools positioning in theeducation system,and(3)upcoming regulatory changes.Compulsory education(Grades 1-9)is fully penetrated,and we expect the trends of increasinggovernment fiscal spending and tighter regulation to achieve more equality forjunior education.That said,some regional opportunities still exist,such asWisdom in Guangdong province.For more details,refer to our industry report.Overweight higher education players:We initiate coverage of China EducationGroup(CEG),Yuhua Education and China New Higher Education(CNH),each atOW.CEG is a top-quality higher education listco,benefitting from favorableschool locations,solid school quality,and a strong balance sheet,which is keyfor M&A growth and land cost payments.Yuhua is changing its focus to highereducation and has demonstrated strong management and operation capabilities.We think CNHs valuation is compelling,with our outlook for 34%adjusted netprofit growth in F20.Cautious on national K12 school operators:We downgrade Bright Scholar to UWand upgrade Maple Leaf to EW(with negatives largely priced in after the recentprice drop),both of which operate K-12 schools nationally.We think the long-term outlook is gloomy,with the overhang of strict regulation.We use scenario-weighted price targets to factor in regulation downside risks.We initiate onWisdom at EW;it has stronger near-to medium-term profit growth,as most of itsschools are in Guangdong province,where demand is high,and its valuation isreasonable.Our price targets are based on probability weighted scenario values we apply a 45%weighting to our bear cases for K-12 school operators.Risks and catalysts:The expected release of official Private Education Promotionimplementation regulation is an important event for school operators,thoughthe timeline is still unclear.But we think higher education is still in a betterposition relative to K-12.For higher education,M&A is still a catalyst,as isconsolidation of acquired schools.Risks include stricter-than-expected regulationand slower-than-expected enrollment/tuition fee growth.Exhibit 1:Initiations,Rating/PT changes andup/downside%upside/(downside)CY2019 CY2020 CY2019CY2020China EducationGroup0839.HKHKD 14.90OW22%25.020.818.415.2Yuhua6169.HKHKD 4.10OW27%12.510.77.46.5China New HigherEducation2001.HKHKD 3.80OW25%11.59.09.17.5Wisdom6068.HKHKD 4.10EW3%16.113.013.311.0Maple LeafEducation System1317.HKHKD 3.00EW-4%12.610.98.57.6Bright ScholarBEDU.NUSD 9.00UW-10%25.322.012.511.1RYBRYB.NUSD 6.50UW-12%28.422.85.24.5New PTPEEV/EBITDARatingTickerSource:Morgan Stanley Research,pricing as of May 22,2019.Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thisreport.+=Analysts employed by non-U.S.affiliates are not registered withFINRA,may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1 Stock Idea SummaryChina Education Group:Initiate coverage at OW with a HK$14.9 price target.ChinaEducation Groups fundamentals are the best among the peers we cover:(1)as thelargest(in terms of student enrollment)listed,100%higher education school operatorin China,China Education Groups universities ranked highly during the past decadeamong Chinas private universities,and its college graduates have a higher-than-averageemployment rate,enabling it to attract more student applications;(2)its schoolnetwork is highly concentrated in provinces where there is rising demand for highereducation(six of its schools are in the Top 5 provinces);and(3)we expect recentacquisitions to boost F19E revenue(we estimate 57%YoY annualized revenue growth inF19).While its newly acquired schools could create short-term pressure on margin,weestimate 19%YoY annualized adjusted net profit growth in F19.We estimate its organicrevenue growth will slow to 19%YoY in F20 and 17%YoY in F21,given an already-highutilization rate(85%),but we believe its strong balance sheet can support further M&A,which we incorporate in our bull case.Our price target of HK$14.9 is derived by assigning 20%/70%/10%probabilities to ourBull/Base/Bear case DCF values.It implies 32x/26x our calendar 2019/2020 EPSestimates.The premium valuation vs.school operator peers(17x on average)is,in ourview,justified by the companys high growth visibility with lower risk,strong balancesheet,and proven acquisition track record.Yuhua Education:Initiate coverage at OW with a PT of HK$4.10.Yuhua is shifting itsfocus from K-12 to higher education,although it had only one university before 2017.Revenue from higher education was 59%of Yuhuas total revenue in 1HF19.We view itsexpansion into universities as positive for margins(average 60%university GPM,vs.47%preschool GPM and 50%Gr1-12 GPM in F16-18).We are also positive on Yuhuas abilityto turn the newly acquired Thailand university to positive profit margin given Yuhuasproven operation ability and synergies with Yuhuas current K-12 schools.While Yuhuahas 37%F19 revenue exposure to Gr1-12,we think our earnings estimates could see 21%and 31%downside risk in F20 in F21,respectively,if the government rules thatcompulsory schools profit doesnt belong to shareholders.Nevertheless,Yuhuasvaluation is still compelling after we include the potential regulatory downside in ourcompany assumptions.Our price target is HK$4.1,derived by assigning 10%/50%/40%probabilities to our Bull/Base/Bear case DCF values,and our bear case assumescompulsory education(Gr1-9)schools cannot be consolidated and operational risk.OurPT implies 16x our 2019 calenderized EPS estimate(in line with the peer average of 17x)and a one-year forward PEG ratio of 0.9x.China New Higher Education:Initiate coverage at OW with a PT of HK$3.80.We likeChina New Higher Education as:1)it operates 100%higher education institutions with ahigher-than-national-average employment rate to attract student applicants,2)weestimate the consolidation of newly acquired schools(Central China School andGuangxi School in F2019 and Gansu School in F2020)will drive up F2019 and F2020revenue growth to 86%/26%YoY,3)two of its schools(contributing 41%of thecompanys F19 revenue,we estimate)are located in the top five provinces for private2higher education investment opportunity(as ranked in our companion industry report),and 4)its also a beneficiary of the positive vocational education trend,as three of itsschools are higher education vocational education institutions(representing 33%of itsF19 revenue,we estimate).Although its gearing ratio is high(46%at end-Feb 2019),therecently completed share placement in April(total of HK$388.5mn)provides somerelief.The key risk is further impairment on its Xinjiang acquisition prepayment if thecompany cannot fully get back its down payment to the seller.Our price target of HK$3.8 is derived by assigning 10%/70%/20%probabilities to ourBull/Base/Bear case DCF values.The stocks multiple has declined to 12x 2019 P/E(below the industry average of 17x)on recent negativities like the Xinjiang project failureand investor concerns over its high student to teacher ratio.We think the currentvaluation is attractive given 30%YoY F2019E adjusted net profit growth.We initiate on Wisdom at EW with a PT of HK$4.10.Schools that are owned andoperated by Wisdom have high teaching quality,a high university acceptance rate(97%),high business visibility from grade 1 to grade 12,and its tuition fees areaffordable.Wisdom has a diversified revenue source,with its percentage of ancillaryservice revenue(33%in F18)higher than at peers.However,we are concerned that:(1)Wisdom will register all its schools as not-for-profit and thus have to self-build newschools going forward.This process takes longer than does M&A,and would result inlower margin during the ramp-up period(usually 2-3 years to breakeven);(2)its gearingis already high,at 47%F18 net-debt-to-equity D/E),and there are still capexrequirements to build new schools(Rmb500-600mn capex per school);and(3)givenits 100%exposure to K-12,we estimate 40%impact to adjusted net profit in F20 if not-for-profit schools profit does not belong to shareholders,and this would be the highestsuch level among peers we cover.Our price target is HK$4.1,which we derive byassigning 5%/50%/45%probabilities to our Bull/Base/Bear case DCF values.Our bearcase assumes compulsory education(Gr1-9)schools cannot be consolidated andoperational risk.Our price target implies 18x our 2019 EPS estimate and a one-yearforward PEG ratio of 1.0 x,slightly above school operator peers average 17x.We lift our rating to EW on Maple Leaf after the recent price drop.Maple Leaf highschool tuition fees fell 3.4%YoY in F1H19 and high school enrollment was down 9%to7,898,despite the addition of two new high schools(Shenzhen and Adelaide Australia)from end-Aug 2018.Preschool,primary and middle school enrollment growth is stillhealthy(up 44%in 1H19),but we are concerned about the high school enrollmentoutlook as the new high school age population in China will be flat in the coming eightyears.We have reduced our revenue estimates for F19-21 on slower expansion of itstuition fees.We raise our operating net margin forecasts in F19 to reflect improvedoperating efficiency.The net result is a 5%upward revision to F19 adjusted net profit buta 9%downward revision to F20 adjusted net profit.Given the recent share price drop,we believe the negatives have largely been priced in.We reduce our price target toHK$3.0,which is derived by assigning 5%/50%/45%probabilities to our Bull/Base/Bearcase DCF values,and our bear case assumes compulsory education(Gr1-9)schoolscannot be consolidated and operational risk.Key risks to achieving our price targetinclude:stricter-than-expected/more lenient policies,faster/slower-than-expectedexpansion of new schools and faster/slower-than-expected tuition fee hike.We downgrade our rating to UW on RYB and will monitor development in new3initiatives.This year,RYB has stated that it will continue policy-related adjustments toits kindergarten schools,work on new initiatives,including providing curriculum contentto its other schools,and explore the market for providing day care services to early-agechildren(aged 0-3).We think this could hurt margins in the short term,but will diversifyits revenue sources.As such,we raise our F19/F20 revenue estimates by 23%/51%andlower our F19/F20 non-GAAP net profit estimates by 35%/11%.We roll over our DCFvaluation time frame to June F20 and lower our price target to US$6.5 from US$8.5(13%downside),reflecting our lower earnings estimates with unchanged WACC(16.3%)andits lower-than-peers ROE(5%in F19).Key risks to achieving our price target include:more lenient policies,faster-than-expected expansion of Play and Learn Centers andfaster-than-expected progress on the product export initiative.We downgrade Bright Scholar to UW on signifiant regulatory risk and stretchedvaluation.The operation of Bright Scholars operations appears to be on track given thecompany has maintained its F19 revenue guidance of Rmb2.3-2.35bn(+34-37%YoY).Thecompany signed an agreement to acquire an 80%stake in a private secondary boardingschool in Wuhan this year,and stated it is on track to open five new kindergartenschools under the self-build model.However,it is subject to regulatory risk,with 50%exposure to K12 education,and we estimate 31%downside risk to its F20 earningsassuming compulsory education schools cannot be consolidated.Bright Scholar sharesare trading at 25x our 2019 EPS estimate,which is expensive as compared to with theindustry average of 17x.We reduce our price target from US$10.5 to US$9.0,which isderived by assigning 5%/50%/45%probabilities to our Bull/Base/Bear case DCF values,and our bear case assumes compulsory education(Grades 1-9)schools cannot beconsolidated and operational risk.Our WACC rises from 12.2%to 14.0%as we lift betafrom 1.6 to 2.0 to be consistent with other school operators we cover.Key upcomingevents to monitor for the listed school operators include the expected release of thefinal official implementation regulation of private education promotion law.Key risks toachieving our price target include:looser-than-expected policy and faster-than-expectedschool ramp-up.4 Valuation ComparisonExhibit 2:Global education compsCY based multiplesTradingClosingPriceMkt CapEVEarningsCAGR1yr FwdPEGCompanyTickerRatingCurrency 22-MayUSDmnUSDmn18-20E19E19E20E19E20E19E20E19E20EChina Education CompaniesUS-listedTAL EducationTALOWUSD34.121,34820,11941%1.242.230.927.820.96.04.46.34.7New OrientalEDUOWUSD82.813,65811,19625%1.128.022.219.314.83.12.43.83.0OneSmart EducationONEEWUSD7.51,3031,05417%1.019.716.49.77.71.61.32.01.6Bright ScholarBEDU.KUWUSD10.01,38594720%1.725.322.012.511.12.72.34.03.4Sunlands Online EducationSTGNCUSD2.9503211N/A0.0-0.89.6-2.125.40.60.40.20.1RiseREDU.OEWUSD9.360149226%1.021.217.510.08.42.11.72.62.1LAIXLAIX.KEWUSD10.3479429-9%0.2-6.6-9.0-6.0-8.42.51.82.82.1TarenaTEDU.ONCUSD3.518895-52%0.0-3.2-9.6-1.8-6.20.30.20.50.4RYBRYBUWUSD7.42347759%1.228.422.85.24.50.50.51.51.4Average31%0.827.520.214.113.32.11.72.62.1HK-listedChina Education Group0839.HKOWHKD12.23,1453,06943%1.325.020.818.415.29.88.310.18.6Virscend Education Co1565.HKNCHKD3.61,4171,48237%0.619.9