Key points of investment
Incident: The company announced FY19 results. In 2019, it achieved operating income of 438 million yuan, an increase of 13.4%, the number of students enrolled was 45,244, an increase of 30.2%; the net profit returned to the mother of 271 million yuan increased 5.7%, and adjusted net profit of 296 million yuan after excluding exchange losses and share option expenses increased 14.4%.
The number of students in Xinhua2 has been growing steadily, and the medical school and Nanjing Hongshan University are expected to release an increase in performance.
The number of students at Xinhua2 increased by 0.8%, and per capita tuition fees increased by 13.9%, driving income growth of 14.8%. 1) Xinhua University: FY19 revenue grew 11%, and the number of students of 28,856 fell 0.2%. Among them, 23,442 full-time undergraduate students increased 2.5%, 5,414 continuing education fell 10.2%, and average tuition fees increased 15.5% in 19/20. 2) Xinhua School: FY19 revenue grew 33%, the number of students increased 5.9% from 5,583 students, and the average tuition fee increased 15.4% in 19/20. The two schools for endogenous students are already in a mature stage. In the future, income will continue to grow steadily as the student structure is gradually optimized and tuition fees are adjusted flexibly.
The Epitaxial 2 school is expected to become a new growth pole. 1) Anhui Medical University School of Clinical Medicine: The first batch of enrollment began in 2018. The number of FY19 students was 1,751. The number of students in FY19 remained at 13,000 to 16,000, and there is a lot of room for improvement. The transfer and consolidation is being accelerated. 2) Nanjing University Hongshan College: Undergraduate colleges located in the Yangtze River Delta region were acquired for $660 million in April 19 and merged into revenue in September. The number of FY19 students was 9,054, with tuition fees of 14,000. The new campus is expected to accommodate at least 20,000 people after completion.
The funds on hand are plentiful to support subsequent acquisitions and the implementation of new construction projects. As of FY19, book cash was $1.38 billion, interest-bearing debt was $330 million, and net cash was $1.05 billion. Targets that have not been completed or are under construction include: 1) the first phase of the new campus of the Clinical Medicine College is expected to be put into use no later than September 21; 2) The Hongshan School of Nanjing University of Finance and Economics has purchased nearly 1,000 acres of land as the site for the new campus, and construction will soon begin. The construction cost of the two schools is estimated to total 7 to 900 million dollars.
The pandemic has put a lot of pressure on employment, and it is expected that private higher education will continue to receive policy support. Under the influence of the epidemic, all types of enterprises in China are facing greater employment pressure. At the same time, China currently has about 7.5 million undergraduate and college graduates and 3.5 million middle school graduates facing employment pressure every year.
To ease employment pressure, the Ministry of Education said on February 28 that it will expand enrollment for master's degree students (189,000) and special upgrades (322,000), and that the direction of enrollment will be heavily skewed towards undergraduate vocational education and applied undergraduate students. Private higher education, as an important force in providing higher vocational education, is expected to continue to benefit from the policy side. We believe that the biggest risk factor that suppresses the valuation of private colleges and universities such as Xinhua is expected to be gradually eliminated.
Profit forecast and investment ratings: We expect FY20-22 revenue of 504/5.75/644 million to increase 15.1%/14.2%/12.0%; the return mother's net profit of 3.02/3.42/385 million will increase 11.7%/13.0%/12.6%. The current market value corresponds to PE 10.5/9.3/8.3X. We believe that the development of endogenous Xinhua University and Xinhua School is relatively mature and stable. Outreach acquisitions contributed to the flexibility of performance, and maintained a “buy” rating at the current time.
Risk warning: policy risk, risk that the number of students falls short of expectations, and Hong Kong stocks are highly volatile