China Chunlai | 1969.HK FLASH NOTE
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FLASH NOTE 3 April 2019 Short Term (6 Months) China Chunlai | 1969.HK Laggard in higher education sector Trading Buy Fundamental Trading Sell Decent organic growth potential for colleges in Henan In 2017, the higher education gross enrolment ratio in Henan was only 41.8%, versus the national level of 45.7%. Based on the 13th Current Price: HK$1.51 Five-year Plan, Henan’s Department of Education target to achieve Target price: HK$2.00 50% enrolment ratio by 2020. Hence, it is easier for colleges there to Upside: 32% apply for more admission quota, even for Bachelor’s degree. During FY14/15-FY17/18, Chunlai’s total students and Bachelor’s degree students recorded 15% and 9% CAGR respectively, and no. of Lewis Pang students increased by low-teen in FY18/19E according to [email protected] management. Chunlai has paid deposits to acquire vacant land nearby its three colleges for expansion, total capacity is expected to (852) 2235 7847 increase by 31% from 50,250 in FY17/18 to 66,000 in 2-3 years. Trading data Tuition fee hike is expected in FY19/20E to offset the increase in 52-Week Range (HK$) 1.24/2.05 teaching staff costs 3 Mth Avg Daily Vol (m) 0.2 The teacher-to-student ratio of Chunlai was lower than the required No of Shares (m) 1.200 1:18 level during track record period, which is to a certain extent common in private higher education institutions. The ratio improved Market Cap (HK$m) 1,812 significantly as of end FY17/18 with no. of teachers increased by 38% Major Shareholders (%) Mr. Hou (75.0%) yoy. As a result, GPM declined from 62-63% in last three years to Xiang Rong Intl 58.1% in FY17/18. We expect GPM to stay under pressure in (5.5%) FY18/19E but improve afterward, as the Company has applied for Auditors Deloitte 20-25% fee hike for new students in FY19/20E, which is reasonable Result Due 1HFY18/19: Apr 19 given tuition fee remained largely unchanged in last 5 years. Hubei College to contribute through services income before Company description completion of the acquisition In Dec 2014, Chunlai paid RMB100mn consideration to acquire an Listed in Sep 2018, Chunlai operate three independent college in Hubei, namely College of Engineering and colleges in Henan Province, namely Shangqiu Technology of Yangtze University. The Company is responsible for its University, Anyang University and Shangqiu operation since then. However, completion of the acquisition is University Kaifeng Campus. Besides, the delayed as change in PRC education policies has yet to be finalized. application for change in school sponsor of Management stated that Hubei college would contribute to FY18/19E College of Engineering and Technology of results through services income before deal completion (Hubei Yangtze University in Hubei Province is still College recorded RMB27-33mn profit during FY14/15-FY16/17). pending for approval. For future inorganic expansion, management viewed that the PRC higher education sector is now a seller's market, and the Company would prefer overseas target that could offer master’s degree that is Price chart appealing to PRC students. Catalyst 1HFY18/19 results; progress in M&A Valuation Trading at 7.6X FY18/19E PE, an unjustified discount to peers We expect core profit (ex-listing expenses) of Chunlai to grow 45% yoy to RMB207mn in FY18/19E, thanks to increase in students, contribution of Hubei College and lower financing costs post listing, Source: Bloomberg partially offset by lower GPM and higher admin costs. Besides, operating margin is expected to improve from FY19/20E onwards due to fee hike. Trading at 7.6X core FY19E PE versus an average of 14.7X for higher education peers, we believe re-rating is deserved. Page 1 of 6 RMB mn (YE Aug) FY14/15A FY15/16A FY16/17A FY17/18A FY18/19E Revenue 336 379 461 488 544 Gross profit 208 234 291 283 307 Core profit 76 88 155 142 207 Core PE (x) 20.6 17.8 10.1 11.0 7.6 Sources: Bloomberg, CIRL Exhibit 1: Number of students School Year 2014/15 2015/16 2016/17 2017/18 Shangqiu University - Bachelor's degree 10,532 10,598 10,052 9,776 - Junior college to bachelor's degree 458 626 1,010 1,150 - Junior college diploma 5,114 6,725 6,354 5,717 - Vocational education programmes 1,040 554 1,978 2,606 Anyang University - Bachelor's degree 8,816 10,036 11,783 11,512 - Junior college to bachelor's degree 795 695 1,474 1,680 - Junior college diploma 1,796 3,026 3,472 3,529 - Vocational education programmes 0 0 1,622 2,803 Shangqiu University Kaifeng Campus - Bachelor's degree 946 1,818 3,637 4,995 - Junior college to bachelor's degree 0 0 0 396 - Junior college diploma 176 397 812 1,046 29,673 34,475 42,194 45,210 College of Engineering and Technology of Yangtze University * - Bachelor's degree 6,649 6,364 6,138 6,144 - Junior college diploma 1,174 1,008 1,361 1,645 7,823 7,372 7,499 7,789 * Application for change in school sponsor still pending for approval Source: The Company Page 2 of 6 Exhibit 2: Average tuition fees School Year (RMB) 2014/15 2015/16 2016/17 2017/18 Shangqiu University - Bachelor's degree 11,984 12,047 12,522 12,839 - Junior college diploma 5,872 5,842 5,822 6,111 Anyang University - Bachelor's degree 12,087 12,136 12,411 12,726 - Junior college diploma 6,012 5,972 5,934 6,214 Shangqiu University Kaifeng Campus - Bachelor's degree 12,028 12,069 12,642 13,013 - Junior college diploma 6,012 5,972 5,934 6,214 College of Engineering and Technology of Yangtze University * - Bachelor's degree 9,018 12,612 13,221 13,581 - Junior college diploma 5,649 8,817 8,703 7,560 * Application for change in school sponsor still pending for approval Source: The Company Exhibit 3: Number of teachers As of 31 Aug of the school year 2014/15 2015/16 2016/17 2017/18 No. of full time teachers - Shangqiu University 267 308 449 - Anyang University 224 283 318 - Shangqiu University Kaifeng Campus 21 31 69 512 622 836 1,234 No. of part time teachers - Shangqiu University 215 230 237 - Anyang University 215 246 272 - Shangqiu University Kaifeng Campus 15 30 61 445 506 570 710 Student to teacher ratio - Shangqiu University 35.6 34.4 28.3 - Anyang University 26.0 26.0 31.1 - Shangqiu University Kaifeng Campus 31.2 36.3 34.2 31.0 30.6 30.0 23.3 College of Engineering and Technology of Yangtze University * - No. of full time teachers 201 180 180 - No. of part time teachers 83 89 102 - Student to teacher ratio 27.5 27.4 26.6 * Application for change in school sponsor still pending for approval Source: The Company Page 3 of 6 Exhibit 4: Income statement Year to Aug (RMB mn) FY14/15A FY15/16A FY16/17A FY17/18A FY18/19E Rev enue 336.3 378.6 460.9 487.8 543.9 COGS (127.9) (144.9) (170.0) (204.4) (236.6) Gross profit 208.4 233.7 290.8 283.4 307.3 Service income from Hubei College 0.0 0.0 0.0 0.0 25.0 Other income 3.3 7.8 7.2 9.9 10.9 SG&A (51.1) (58.8) (65.0) (69.3) (79.4) Operating profit 160.6 182.7 233.0 224.0 263.8 Other gains/(losses) (0.0) (5.3) (0.7) (0.1) 0.0 Finance costs (84.4) (89.2) (77.5) (80.6) (55.0) Income tax expenses 0.0 0.0 0.0 (0.8) (2.0) Core profit 76.1 88.2 154.7 142.4 206.8 Listing expenses 0.0 0.0 (3.1) (23.5) (10.8) One off gains/(feets) (138.9) 21.6 0.0 0.0 0.0 Net Profit (62.8) 109.8 151.6 118.9 196.0 Source: The Company, CIRL Exhibit 5: Balance sheet Year to Aug (RMB mn) FY14/15 FY15/16 FY16/17 FY17/18 Cash & equiv 233.2 371.7 367.3 544.6 Trade and other receivables 3.5 7.7 34.4 47.4 Other current assets 53.6 106.5 180.6 8.4 PPE 563.6 603.6 535.3 392.9 Prepaid lease payments 327.6 22.7 22.2 21.8 Prepayment for cooperation agreements 250.0 0.8 0.0 0.0 Other non current assets 4.3 478.9 643.8 1,060.1 Total assets 1,435.8 1,591.8 1,783.7 2,075.1 Short-term borrowings 53.6 63.5 473.8 265.4 Deferred revenue 212.1 243.5 195.8 358.4 Other payables and accrued expenses 150.4 149.9 108.3 169.0 Other current liabilities 0.0 3.1 2.1 0.8 Long-term borrowings 795.9 798.3 518.5 686.8 Other non current liabilities 40.0 40.0 40.0 0.0 Total liabilities 1,252.0 1,298.3 1,338.5 1,480.3 Shareholders' equity 183.8 293.5 445.2 594.8 Minorities 0.0 0.0 0.0 0.0 Total equity 183.8 293.5 445.2 594.8 Net cash (debt) (616.3) (490.1) (625.0) (407.5) Source: The Company Page 4 of 6 Exhibit 6: Peers comparison Ticker Mkt cap Price P/E(x) P/B(x) (HKD mn) (HKD) FY18A FY19E FY18A FY19E Higher Education Companies MINSHENG EDUCATI 1569 HK 7,232 1.80 18.3 14.3 1.6 1.5 CHINA NEW HIGHER 2001 HK 5,195 3.63 18.0 11.2 2.3 2.0 CHINA EDUCATION 839 HK 23,677 11.72 36.3 23.1 3.2 2.9 CHINA XINHUA EDU 2779 HK 3,957 2.46 12.3 11.3 1.5 1.3 HOPE EDUCATION G 1765 HK 7,933 1.19 33.9 14.3 1.8 1.5 CHINA GINGKO EDU 1851 HK 1,100 2.20 26.5 N/A N/A N/A CHINA KEPEI EDUC 1890 HK 6,603 3.30 N/A 14.1 2.6 2.1 Average 24.2 14.7 2.2 1.9 CHINA CHUNLAI ED 1969 HK 1,812 1.51 11.0 7.6 2.7 1.0 Source: Bloomberg, CIRL Page 5 of 6 Rating Policy Rating Definition Buy Outperform HSI by 15% Stock Rating Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Sector Rating Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10% Analysts List Hayman Chiu Research Director (852) 2235 7677 [email protected] Lewis Pang Associate Director (852) 2235 7847 [email protected] Kenneth Li Associate Director (852) 2235 7619 [email protected] Farica Li Research Analyst (852) 2235 7617 [email protected] Leanna Xiao Research Analyst (852) 2235 7719 [email protected] Chloe Chan Research Analyst (852) 2235 7170 [email protected] Edith Li Research Analyst (852) 2235 7515 [email protected] Analyst Certification I, Lewis Pang hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities.