Phoenix New Media Hong Kong stock | China Merchants (Hong Kong) published a research report that the share price of the higher education industry has fallen 36% from its recent peak, and the price-to-earnings ratio for the next 12 months has fallen from 13 times to 7 times (- 46%). It is mainly affected by the weak investment sentiment caused by the KM12 training policy. The bank believes that the fundamental growth of higher education is still sound, and the driving forces are as follows: 1) continuous policy support: private higher education is supported by vocational education (such as vocational undergraduate education) and college promotion. The regulations on the implementation of the people's Promotion Law (the final draft of the people's Promotion Law) was finally issued in May 2021, eliminating the policy uncertainty in the higher education industry; 2) the income growth rate in fiscal year 22 is highly visible, supported by the steady growth in the number of students reported in the 2021 Universe 22 academic year (the year-on-year growth range of the number of students in listed companies is 4% ran 44%, with an average year-on-year growth rate of 26%). 3) quality improvement, preparing for potential promotion to vocational undergraduate universities / majors, driving up tuition fees; 4) higher profit margins, benefiting from the management fee savings brought about by the conversion of independent colleges, but for relatively mature schools, profit growth will come more from income growth than from higher profit margins. But the bank also sees that M & A priorities may be lower than before the epidemic, mainly due to: 1) higher valuations of target schools; 2) listed companies focus on school quality. The bank expects the average revenue of the companies covered in fiscal 22 to grow by 27% year-on-year, and the average core profit to grow by 31% year-on-year.
Under the influence of strictly restrictive national policies, the major training company has announced that it will withdraw from the Kmur9 discipline training business (related links) by the end of 2021. The general transformation route includes: quality education, adult education, intelligent hardware, ToB business and so on. The bank maintains its previous view: 1) it will be easier for online companies to transform than offline companies, based on lower rents and labor costs; 2) companies with traditional adult education businesses such as youdao (DAOUS) and New Oriental Education & Technology Group (EDUUS) will have more viable business legacies. The bank believes that Gaotu Techedu Inc. (GOTUUS) and New Oriental Education & Technology Group online (1797HK) will have a high profit possibility, due to the significant reduction in advertising costs and profitable adult business. In addition, the bank saw New Oriental Education & Technology Group online's share price jump 116% from November 2 to November 23, mainly driven by its live delivery plan, but the bank believes the business is still in its infancy and its contribution to revenue is limited. The bank notes that New Oriental Education & Technology Group online now has a market capitalization of 2.4 times its net cash for fiscal 21.
The bank reiterated its bullish view on the higher education industry. Based on the uncertainty of the transformation, the bank maintains a neutral rating on the education industry. Maintain the buy rating of New Oriental Education & Technology Group and maintain the neutral rating of other covered training companies. The company's share price continues to fluctuate at historic lows, and the bank believes that although there is a lack of a strong business direction in the medium term, the cash levels of these companies can partly support their valuations.