Wisdom Education's adjusted net profit for FY19 was RMB 429 million, slightly lower than our expectations. We believe that endogenous growth (such as existing school expansion and tuition fee increases) remains the main driver, but given the high base, growth will slow down in the future. We believe the overall policy risk in the K-12 school sector is still higher than in other education sectors. Maintaining the “hold” rating, the latest target price is HK$3.80, based on 15 times the FY20 price-earnings ratio. Net profit for FY19 was 360 million yuan. Performance fell short of expectations due to one-off projects. Insight Education's net profit for FY19 increased 16% year over year to 359.5 million yuan, lower than our forecast of 413 million yuan. Excluding one-time items, such as exchange losses of RMB 17 million and adjusted interest expenses of RMB 23 million on convertible loan notes, the adjusted core net profit was RMB 429 million. The company's business revenue grew strongly during the period, up 38% year on year to 1,727 million yuan. Although this was mainly due to a 25.9% year-on-year increase in the number of aided students to 54,420, it was also supported by an 8.2% year-on-year increase in average tuition and accommodation fees to RMB 21,049 per person. Gross margin declined slightly by 0.4 percentage points to 55.9% year on year because employee costs rose 50% year over year to 471 million yuan. FY20 student enrollment growth or slowed strong growth in FY19 student enrollment, mainly due to the addition of 7,863 new students to existing schools. In FY19, the company also opened or merged three schools, adding 3,327 new students. However, in FY20, growth has slowed, with enrollment increasing by only 10.5% year over year to 60,116. Enrolment in existing schools increased 9.2% year over year, as two of the eight existing schools recorded a decline in enrollment. Although the company will open three new schools in FY20, these schools contributed only 978 people in FY20, which did little to stimulate overall growth. Management believes that it takes an average of six years for a new school to mature and bring a more obvious profit contribution. High debt ratios or limits the pace of expansion Although the company acquired a school in FY19 (Zhangpu Longcheng Middle School), we don't think the company can rely on acquisitions to achieve growth in the future, because compulsory education schools seem to be affected by policies, and Wisdom Education has a relatively high debt ratio. Due to the company's capital expenditure of RMB 904 million in FY19, the adjusted net debt ratio (including deposits) increased from 24.1% at the end of FY18 to 51.0% at the end of FY19. Even considering that part of the HK$500 million convertible loan notes may be converted into equity in the future, this figure is still higher than that of its peers. Capital expenditure in FY20 will fall to 700 million to 800 million yuan, so management expects the net debt ratio in FY20 to be even lower. To support growth, Insight Education is exploring the possibility of using an asset-light model to operate schools in Dongguan and Foshan. It is also in talks with four new schools in Chaozhou, Jiangmen, Guangzhu, and Zhaoqing, but details are yet to be revealed. We are still wary of policy risks. In July 2019, the State Council issued a policy requiring private compulsory education schools to enroll students simultaneously with public schools. We expect this policy to have a negative impact on Insight Education's long-term enrollment growth. We are also wary of overall policy risks in the compulsory education market, particularly those relating to the “Regulations on the Implementation of the Private Education Promotion Law of the People's Republic of China”. We lowered our earnings per share forecast for FY20-21 by 7-9% to reflect the impact of slowing student enrollment growth and lower gross margin forecasts. Maintain a “hold” rating. The target price was adjusted to HK$3.80. We kept our target price-earnings ratio of 15 times unchanged for FY20, which is 0.54 standard deviations below the historical average since listing. The main upside risk comes from the announcement of favorable policies.