Events. On September 4, 2017, Guangdong Songfa Ceramics Co., Ltd. issued an investment announcement in France. The company signed the "Capital increase Agreement of Fan Xue (Shanghai) Education Technology Co., Ltd." with 23 natural persons or enterprises, including Chen Haihui, Yanyang, Gongxue, and other original shareholders of Fan Xue Education. The company intends to use its own capital of RMB 20 million yuan to increase capital and participate in Fan Xue Education in the form of cash, of which RMB 690600 yuan is included in the registered capital and the remaining RMB 19.3094 million yuan is included in the capital reserve. After the completion of the above capital increase, the company holds a 2.22% stake in Van Xue Education.
With the increase of investment in education and the beginning of channel content resources, the follow-up training layout for children is expected to benefit from the trend of concentration of quality brands under the growth of market demand and consumption upgrading. Fanxue Education, founded in July 2014, is the exclusive distributor of National Geographic Learning China and the exclusive partner of STEM China of the New York Academy of Sciences. The company is determined to bring the top overseas quality education resources to Chinese teenagers. All schools focus on quality education for children aged 4-12, including English, science and art training. Since its establishment, the company has cooperated with high-end kindergartens in Beijing, Shanghai, Guangzhou, Hangzhou, Nanjing, Chengdu and other regions to build high-end bilingual libraries in kindergartens. So far, 1165 kindergarten libraries have been built for general education. More than 400000 kindergarten children borrow on this platform. At the same time, the company provides English, science and art courses to full-time kindergartens, primary and secondary schools. Relying on this network of kindergarten libraries covering high-income people in economically developed areas across the country and active children, Van Education has set up 28 amateur training schools for children in Beijing, Hangzhou, Jiangsu and Guangdong. The counterparty in this transaction promises that the audited net profit of the underlying company in 2017 and 2018 will not be less than 20 million yuan and 60 million yuan respectively.
The company firmly carries on the strategic transformation, distributes the education plate, participates in the master education, holds the Daigo brothers, and the online and offline education ecology is emerging. This increase in investment in education will further extend the educational layout, achieve the company's strategic development goals, and enhance the company's profitability and sustainable development in the future. The company will continue to operate in the double main business mode of "ceramics + education" in the future, which has a good development prospect.
Profit forecast and investment advice. Based on the company's brand and scale advantages in the ceramic industry, the company is expected to maintain steady growth in the main ceramic industry. At the same time, since the listing, the company has tried many mergers and acquisitions in the education industry, and the persistence of the transformation and layout of the education sector can be seen. From 2016 to now, by investing in enlightened master education and Daigo brothers with significant regional or product barriers, on the one hand, they have brought positive profits and investment returns to the company, on the other hand, they also reflect the company's rigorous and responsible attitude towards education investment. Combined with the investment layout of the company, the past profit trend of the existing main business and target, and the performance commitment of the target counterparty, we estimate that the net profit from 2017 to 2019 will be 67.6 million yuan, 96.59 million yuan and 117.83 million yuan respectively, and the corresponding EPS will be 0.77 yuan, 1.10 yuan and 1.34 yuan respectively. Compared with other transitional education companies, we give Songfa shares a multiple valuation of 2017E45 and give an overweight rating corresponding to the target price of 34.65 yuan per share.
Risk hint. Ceramic main business is not as expected, epitaxial mergers and acquisitions are not as expected, market risk and so on.