China Merchants International Development and Research report$China Education Group (00839.HK)$It announced the placement of 147 million new shares at an issue price of HK $10.94, a discount of about 8.8 per cent to the previous day's closing price and about 2.4 per cent to the average closing price over the past five days. The total amount of funds raised is HK $1.6 billion. Management plans to spend most of the net proceeds on school expansion, including campus construction and potential acquisitions. As for the choice of the target of M & A, Zhongjiao stressed that it will pay attention to two factors, one is that the valuation of the target should be reasonable, and the other is that the target needs to have development potential. In addition, the management indicated that it would maintain a dividend payout rate of about 50%.
The bank believes that the suspension of acquisitions by Zhongjiao and other higher education companies from 2021 is mainly due to upside-down valuations in the primary and secondary markets. With the recent valuation fix, the 12-month price-to-earnings ratio for the next 12 months has risen to 11.6 times from 5.1 times (at the bottom of October 2022), compared with an average of 6.9 times for the industry. Management stressed that they saw a large number of market integration opportunities in the primary and secondary markets and that potential acquisitions would drive future earnings growth in a stable policy context.
The bank raised its core net profit for the 24 fiscal year by 1 per cent and raised its target price from HK $11 to HK $14 to reflect potential growth and valuation fixes brought about by mergers and acquisitions. The bank is optimistic about the outlook for the industry, and expects the core net profit of higher education companies to grow by 13% in fiscal 23, thanks to vocational education policy support, healthy endogenous growth and the upward potential of mergers and acquisitions. Wait for the resumption of mergers and acquisitions by Chinese education and other higher education companies, such as New higher Education (02001) and Hope (01765), which have adequate capital reserves and healthy debt structure.
