Company News The company plans to change some of the fund-raising purposes and plans to use 262.5 million yuan (accounting for 28.59% of the total fixed increase of 918 million yuan in October 2017) to acquire 35% of Kerry Alliance's shares. Comment on the matter: Kerry Alliance is the leader in the number of schools that have joined children's language training. Kerry Alliance, the exclusive operator of “Sesame Street English”, was founded in 2013. Chairman Wang Lin is one of the founders of ATA, and director Cao Qing was once ATA's chief operating officer. Kerry Alliance mainly operates the children's English training business under the “Sesame Street English” brand. It is the exclusive licensee of “Sesame Street English” in mainland China (excluding Taiwan and Fujian), Hong Kong and Macau. “Sesame Street English” is a high-end English training brand for children in China. As of the end of 2017, Kerry Alliance had 6 direct-run stores and 348 contracted franchise schools. Up to now, 197 schools have started operations, covering 150 regions across the country, with a cumulative total of more than 50,000 students. “Sesame Street English” provides EFL (English as a Foreign Language) comprehensive multimedia education curriculum for children aged 3-12, including a complete 9-year curriculum system, which mainly consists of three levels of main course+supplementary beautiful character courses. Among them, the three-level main courses are the kindergarten curriculum of K1-K3, the elementary school beginner course of P1-P2, and the advanced elementary school course of P3-P6. In 2016-2017 and 2018Q1, Kerry Alliance's revenue was $0.87/133/029 million, respectively, and net profit was $1384/4695/6.8 million respectively. Kerry Alliance promises that the net profit for 2018-2020 will not be less than 5000/6100/74 million yuan, respectively. Kerry Alliance develops “direct alliance” cooperation. CRM and ClassServer improve campus operation levels Kerry Alliance adopts a unique “direct alliance” cooperation model. The headquarters control department deeply connects with franchise store operations, marketing, academia and sales departments to provide accurate services to franchisees, unify the operating model, service system and product system between headquarters and member schools, and reduce the risk of franchisee management under the shallow franchise model. Currently, the number of schools that have signed contracts has reached nearly 350, and Kerry Alliance has become one of the largest member schools in the domestic children's language training industry. After Weichuang takes a stake in the future, the two sides plan to set up a hundred Sesame Street English learning centers by building a new type of direct management center, opening up an affiliate system, and developing high-quality franchises. On the other hand, Kerry Alliance continues to use technological advantages to improve the level of campus operation. The complete CRM system provides franchisees with a full range of services from enrollment to post-operation. The self-developed ClassServer cloud platform provides a new generation of interactive Internet education solutions for the campus, enhances the interactivity of teaching scenarios, provides big data in teaching, and powerful course & student management tools. Full deployment began in early 2018. To fill the “Child Growth Strategy” map, companies developing kindergarten+high-end English industry chains have established strategic partnerships with many high-quality enterprises in the field of children's education, such as Bei Chat, Chula Reading, Huameng Star Sports, and Wonder Workshop. The acquisition of Kerry Alliance's shares will expand children's English training programs and further fill the “Child Development Strategy” map. After this strategic investment, the company will share franchise customer resources with Kerry Alliance and introduce some high-quality franchisees within the company to participate in the further national layout of Sesame Street English. At the same time, this equity cooperation lays the foundation for the company to establish a deep strategic connection with the “Sesame Street English” brand. In the future, it is expected that products or services related to children's development will be developed around the well-known “Sesame Street English” IP. The company develops the kindergarten+high-end English industry chain to further create a closed loop of business that accompanies children to grow. The investment proposal does not consider the impact of the 35% equity acquisition of Kerry Alliance. We maintain our profit forecast. The estimated net profit attributable to the company in 2018-2020 is 2.89/3.59/434 million yuan, respectively, 0.32/0.39/0.48 yuan for EPS, and 29/23/19 times for PE (based on the 2018/5/14 closing price of 9.07 yuan/share). The company is the leader in preschool education in the country. It has four major brands: Hongying Education (kindergarten membership in third- and fourth-tier cities), Golden Cradle (middle and high-end schools in Tier 1 and 2 cities), Ker Education (Beijing middle and high end schools), and Dingqi Preschool Education (leading preschool education in Inner Mongolia). In the future, it will enhance the value of single schools by promoting managed franchise services and increase the construction of children's arts and sports training center projects. This time, we have invested in the Kerry Alliance and invested in “Sesame Street English” to expand high-end children's English training business. The preschool education industry is becoming more and more ecologically rich. Maintain the “Overweight” rating. Risks indicate policy risks, increased market competition risks, kindergarten operation and management risks, acquisition and integration risks, etc.