Core views

The company released its 2019 performance report, with steady revenue and profit growth. In recent years, various favorable policies such as capital upgrades and recruitment expansion have been gradually implemented. As the largest private higher education group in the Yangtze River Delta, the company will fully enjoy policy dividends. Taking into account profit consolidation factors and cost rate changes of Anhui Medical University and Hongshan University, the company's 2020 EPS forecast was fine-tuned to 0.20 yuan (the original forecast was 0.22 yuan), and the new 2021 EPS forecast was 0.23 yuan to maintain the “buy” rating.

Revenue is growing steadily, and it is proposed to distribute cash dividends of RMB 81.07 million. The company's total revenue in 2019 was 553 million yuan/ +15.8%; of which the main revenue was 438 million yuan/ +13.4%, mainly benefited from the increase in the total number of students enrolled and the increase in average tuition fees; other revenue was 115 million yuan/ +25.8%, mainly the increase in operating income of Hongshan University; adjusted net profit of 296 million yuan/ +14.4% (adjusted for exchange gains and loss and equity amortization expenses). Cost control was good in 2019, with a gross margin of 59.7%, the same as the previous year; the sales expense ratio was 1.8% (+0.2pct); and the management expense ratio was 21.5% (+6.5pcts), due to increased remuneration and expenses related to acquisition activities due to the employment of high-level personnel. The company plans to pay a dividend of 5.53 Hong Kong cents per share at the end of the period, totaling RMB 81.07 million.

The book capital is plentiful, and the credit limit is sufficient. By the end of 2019, the company had a book capital of about 1.4 billion yuan and signed a strategic cooperation agreement with the Industrial and Commercial Bank of China to provide the company with a total credit of no less than 5 billion yuan over the next five years, laying a solid foundation for the company to continue advancing its outreach mergers and acquisitions strategy.

Endogenous volume and price have risen sharply, and epitaxial expansion has been steadily expanding. Tuition revenue in 2019 was 392 million yuan/ +14.7%, and accommodation income was 46 million yuan/ +2.7%; as of December 31, 2019, the total number of newly enrolled full-time students was 12,493/+41.1%. Excluding the 2,291 new students enrolled at Hongshan College, there was still a 15.6% year-on-year increase. The total number of students enrolled was 45,244/+30.2%. Looking at schools, 1) Xinhua School enrolled 2,237 new students/ +8.5% in the 19/20 academic year; the number of students enrolled in 2019 was 5,583/ +5.9%; tuition fees for middle school students in the 19/20 school year rose to 9000-11400 yuan/person (5,200-10400 yuan/person in the 18-19 academic year). Annual revenue increased 33% year-on-year. Among them, tuition revenue increased 32% and accommodation income increased 37%; 2) Xinhua University enrolled 6,790/ +9.7% of new full-time students in the 19/20 school year. The number of full-time students enrolled in 2019 was 23,442/ +2.5%, the number of students enrolled in continuing education was 5,414/ -10.2%, and the tuition fee for full-time undergraduate students in the 19/20 academic year rose to 19800-23800 yuan/person (16500-25,000 yuan/person in the 18-19 academic year). Annual revenue increased 11% year-on-year, with tuition revenue increasing 13%; 3) The number of students enrolled in clinical medicine of Anhui Medical University in 2019 was 1,751/+204.5%, new enrollment increased 104.3% year-on-year, and new enrollment increased 104.3% year-on-year. The work has been incorporated into the “13th Five-Year Plan” of the Anhui Provincial Department of Education. The school will purchase 224.27 acres of land for the construction of the new campus. After completion, it will be able to accommodate at least 10,000 people. The first phase of the project is expected to be put into use no later than September 2021; 4) The company officially took over the operation of the Hongshan College of Nanjing University of Finance and Economics in September 2019. The school had 9,054 students enrolled in 2019, with a tuition fee of 14,000 yuan/person. Construction of the new campus can begin in the first half of 2020, and is expected to accommodate at least 20,000 students after completion.

Discipline construction continues to be strengthened, and epitaxial mergers and acquisitions continue to advance. In 2019, Xinhua University was successfully approved to grant master's degrees to project construction units, and signed talent training and employment agreements with more than 100 high-tech enterprises in Hefei; the enrollment rate for the first promotion of Anhui Clinical Medicine was 97.81%, the unified undergraduate enrollment registration rate was 96%, and it signed contracts with 2 affiliated hospitals and 32 teaching internship hospitals; in terms of outreach, the company will adhere to the quantitative requirements of “1-2 schools per year, guarantee 1 institution”, “mainly undergraduate studies, taking into account others” level requirements, “the Yangtze River Delta is the main focus, taking into account other provinces”” Regional requirements, continuous acquisitions High quality higher education assets.

Risk factors: the risk that the speed of extended acquisitions falls short of expectations, the risk that the results of acquisition integration are not as good as expected, the risk of policy uncertainty in the “Regulations on the Implementation of the Law on Promotion of People's Rights”, and the risk of uncertainty about capital increases and expansion quotas.

Investment suggestions: In recent years, various favorable policies such as increasing capital and expanding recruitment have been gradually implemented. As the largest private higher education group in the Yangtze River Delta, it is expected that the company will fully enjoy the policy dividends. Considering the profit consolidation factors and cost rate changes of Anhui Medical University and Hongshan University, the company's 2020 EPS forecast was fine-tuned to 0.20 yuan (the original forecast was 0.22 yuan), adding the 2021/2022 EPS forecast to 0.23/0.27 yuan to maintain the “buy” rating.