It is proposed to acquire Carey Alliance to lay out children's language training business, introduce "Sesame Street English" and expand IP product exploration. The company announced that it plans to pay 263 million yuan in cash to acquire 35% of the shares of Beijing Kerry Alliance Education Technology Co., Ltd. Carrey Alliance performance commitment for 2018-2020 deduction of non-net profit of not less than 50 million yuan, 61 million yuan, 74 million yuan respectively. Kerry Alliance mainly operates the children's English training business of the "Sesame Street English" brand, and is the exclusive licensee of "Sesame Street English" in the mainland (except Taiwan and Fujian) and Hong Kong and Macao. By the end of 2017, Kerry Alliance had 6 direct stores and 348 signed-up schools (197 have been in operation), covering 150 regions across the country, with a total of more than 50,000 students. Sesame Street English provides EFL (English as a Foreign Language, English as a foreign language) comprehensive multimedia education course for 3-12-year-old children. After four years of operation by Carrey Alliance, it has been built into an influential domestic high-end children's English training brand. The teaching system of Sesame Street English is mainly composed of three stages of main courses and auxiliary good character courses. The course is equipped with more than 200 interactive games every year, which are taught in an interdisciplinary, fully immersive and interactive way.

It is proposed to acquire Little Orange Castle to expand the drama performance business and cut into the parent-child culture track. On July 6, 2018, the company announced that it was planning to acquire 100% of Shenzhen Xiao Orange Bao Culture Communication Co., Ltd. in the form of cash and share issuance, and signed the Framework Agreement on Xiao Orange Castle acquisition Project on July 5, 2018. The transaction consideration is to be calculated on the basis of 16 times the price-to-earnings ratio of the target company's net profit in 2018. With early childhood education business as its core, Xiao Orange Castle provides high-quality comprehensive growth solutions for children. since its establishment, it has successively hatched micro-theatres, exhibition business and online children's variety shows for middle and high-end audiences. Three major product lines of performances, art special exhibitions and video programs have been formed in the field of parent-child culture, and the cost of performance has been controlled through budget management. Form a more mature weekend children's theater model and micro-theater management model, with a good scale expansion ability. Up to now, Xiao Orange Castle has 14 fixed weekend parent-child bases across the country, with more than 2000 children's dramas in the whole year, and has been the industry leader in the domestic children's drama market for three consecutive years.

Kerry Alliance and Little Orange Castle are expected to form business cooperation with the company and enrich the ecological layout of early childhood education. According to the company's announcement on the acquisition of equity and the change of the use of part of the raised funds, the acquisition of Carrey Alliance is coordinated with the company's "Child growth Strategy" and is an important step in establishing a deep strategic connection with the "Sesame Street English" brand. In the future, both parties will not rule out exploring the development of products and services related to children's growth around this IP. According to the "suggestive announcement on planning the acquisition of assets", the main audience of Xiao Orange Castle to watch children's dramas and parent-child cultural exhibitions is between 2 and 8 years old, which coincides with the age level of the children's growth business of Willoux Stock. In the future, Little Orange Castle can cooperate with the company in many aspects, such as user diversion, drama education development, exhibition business communication, sponsorship and brand promotion. Further enhance the comprehensive strength of the company as a platform for children's growth.

Profit forecast and investment advice. Preschool education industry is in the stage of rapid development, the demand remains strong, and there is much room for improvement in concentration and operation level. At the same time, the industry is in urgent need of integration, capital, management and resources. From the perspective of market share, the company is currently the company with the largest number of kindergartens in the preschool education industry, with a leading advantage. Excluding the acquisitions of Carrey Alliance and Xiao Orange Castle, we expect the company's 2018-2020 net profit to be 289 million yuan, 382 million yuan and 434 million yuan respectively, corresponding to 0.32 yuan, 0.42 yuan and 0.48 yuan for 2018-2020 EPS. Due to the adjustment of the A-share market, the overall valuation level of listed companies in the A-share education sector has moved downwards. Out of prudent consideration, we have lowered the valuation of listed companies. Compared with the average PE of comparable listed companies in transformational education in 2018, we give the company 28-29 times PE in 2018, with a reasonable value range of 8.96-9.28 yuan and a rating of "better than the market".

Risk hint. The risk of shortage of preschool education talents, the risk of acquisition and integration, the increased risk of market competition, and the safety risk of kindergarten.