Income of Chengshi Foreign Education (HK $1565.HK $4.58, unrated) rose 9.4 per cent year-on-year to 479.6 million yuan in mid-17 years. Attributable profits rose 8.3 per cent year-on-year to 176.5 million yuan. The earnings per share is 0.06 yuan. We believe that the new school under the company will take some time to increase its enrollment. The shares are currently trading at 35 times 2017 earnings, and we believe that despite the opening of new schools and higher tuition fees, this valuation is still expensive because its impact on earnings will not be apparent until the 2018-19 school year.

Increase in enrollment and rising tuition fees for new students drive growth

The company's income growth during the period was mainly due to an increase in enrollment students and an increase in average tuition fees. By the end of June, the number of students had reached 34458, up 6 per cent from a year earlier. Chengshi Foreign Education also raised tuition fees for new students. At present, the average tuition fee of Kmuri 12 is 29000 to 33900 yuan per year, 92000 yuan for international courses and 12800 yuan for college students.

Although the cost of sales has risen by 14%, the gross profit margin has risen slightly. Staff costs account for nearly 30% of revenue. We believe that excellent academic performance is one of the reasons for the company's strong operating data and profit margins. In the 2017 college entrance examination, about 94.6% of the company's high school graduates were admitted to the first batch of Chinese universities, and more than 60% of the high school graduates were admitted to universities participating in the "211 Project" and "985 Project".

Valuation

Chengshi education is now at a premium to its peers, in part because of the company's ability to use its reputation to expand its school network in the southwest. Chengshi Foreign Education will open six campuses this year: Wulongshan Campus, Mei Nian Campus, Wenjiang Campus, High-tech West Campus, Panzhihua Campus and Zigong Purun Campus. These schools are expected to increase the total capacity of the company by 24000. In the long run, the company will expand in the following ways:

(I) setting up new schools in partnership with local governments and real estate companies such as Longhu; (ii) mergers and acquisitions with existing schools; and (iii) partnering with overseas schools to open new international schools.

According to the market consensus forecast, Chengshi wai Education's profit will increase by 15% in 2017 compared with the same period last year, representing a price-to-earnings ratio of 34 times in 2017. As a result, the company's valuation is higher than the industry's median. Although the company will open a number of excellent schools, we think that it may take some time for the new schools to be profitable. As a result, although the company's earnings are expected to grow by nearly 30% in 2018, we think its valuation is high. We believe Maple Leaf Education has a more attractive valuation, with a price-to-earnings ratio of 20 times 2017 earnings.