Company dynamic events

According to the company's quarterly report for 2018, Q3 achieved revenue of 304 million yuan, down 6.31% from the same period last year, and the attributable net profit was 51.03 million yuan, down 29.19% from the same period last year.

Comments on matters

The quarterly revenue growth slows, and the rising expense rate leads to a slowdown in earnings.

In the first three quarters, the company achieved a total revenue of 825 million yuan, an increase of 3.19% over the same period last year. The revenue growth rates of Q1, Q2 and Q3 were 20.02%, 3.39% and-6.31% respectively, which declined quarter by quarter, mainly due to the decline in VW business revenue from the same period last year and the steady growth in preschool education business income. The total gross profit margin of the company from January to September was about 54.81%, a slight increase over the same period last year, of which Q3 gross profit margin was 57.73%, an increase of 5.68pct over the same period last year. 2018Q3, during the period of the company, the expense rate increased significantly, of which the management expense rate increased 1.41pct compared with the same period last year, mainly due to the increase in subsidiary management expenses; the R & D expenditure reached 21.8 million yuan, mainly for the information investment in preschool education, and the R & D expense rate reached 7.16%; the financial expense rate increased 0.12pct over the same period last year, mainly due to the increase in bank loan interest expenses; the sales expense rate decreased 0.66pct compared with the same period last year, and the overall expense rate increased 8.03pct over the same period last year. Affected by the decline in income growth and the increase in expense rate, the company achieved a total attributable net profit of 147 million yuan in the first three quarters, down 16.34% from the same period last year. The profit growth rates of Q1, Q2 and Q3 were 15.23%,-15.31% and-29.18%, respectively.

The company expects the annual attributable net profit in 2018 to be about 152 million yuan to 209 million yuan, a year-on-year change of about-20% to 10%.

Ecological layout around the industry chain of early childhood education

The company is the largest kindergarten operation and service company in China. as of the first half of the year, the number of kindergartens is close to 5200, with four major brands: Hongying Education, Golden Cradle, Kerr Education and Dingqi Education. Hongying Education is now in the period of internal adjustment and brand upgrading, affected by the active suspension of joining business development, the income side has declined, and the "new Hongying" project of promoting "managed joining" in the high-end park has led to rapid cost growth and short-term profit pressure. Golden cradle due to part of the park renovation, policy impact on site acquisition, income growth has declined. Kerr and Dingqi have maintained steady growth and will expand their key areas in the future. Around the preschool education industry chain, the company invests "Sesame Street English" to enter the children's English track, increases its capital with 50 million yuan in cash, holds its 12.50% equity stake, and distributes the production end of Internet preschool education courses; jointly set up a 500 million yuan industrial fund with Tianfeng Tianrui, and the company plans to invest no more than 100 million yuan to invest in children's education track to further promote the platform strategy for children's growth.

Share buyback shows confidence

The company intends to buy back the shares with its own funds of not less than 50 million yuan and not more than 100 million yuan, and the repurchase price shall not exceed 11.95 yuan per share. As of October 16, the company had bought back a total of 5.7302 million shares, accounting for 0.63% of the total share capital, with a cumulative transaction value of about 30 million yuan.

Investment suggestion

As the VW business continues to decline and the management / R & D expenses are relatively large, we adjust our profit forecast and ignore the impact of Carriage Union investment for the time being. It is estimated that the company's vested net profit from 2018 to 2020 will be RMB 288 million, corresponding to EPS of RMB 0.20max, and PE of RMB 0.28 per share, respectively (based on the closing price on 2018-10-30). The company is the leader of preschool education, Hongying education has positive internal structural adjustment, short-term performance is under pressure, and the future brand upgrade is expected to gradually return to profitability; the golden cradle business expansion has led to a rise in labor costs. profits are expected to pick up as economies of scale reflect. The company continues to lay out the industry of preschool education, invests in Carrey Alliance to improve the ecology of offline preschool education, and actively carries out the information construction of preschool education. In the medium and long term, we are optimistic about the future development of preschool education in the company and maintain the "overweight" rating for the time being.

Risk hint

The risk of uncertainty brought by strict supervision, the risk of continuous decline of VW business, the risk of intensified market competition, the risk of kindergarten operation and management, the risk of acquisition and integration, and so on.