Doubling of the teaching center drives a substantial increase in revenue and profits.
Sikole Education announced its 2019 results: revenue rose 44.3% year-on-year to 710 million yuan, with a gross profit margin of 42.7%, an increase of 4.8 percentage points over 2018, mainly due to the acceleration of the learning center opened in 2017-2018 to enter the growth phase. Adjusted core operating profit rose 62.4 per cent to 136 million yuan, or 0.19 yuan per share, up 15.5 per cent year-on-year. Affected by the epidemic this year, the company downgraded the guidelines for new teaching centers, and we expect revenue growth to slow significantly, but we believe the company will return to growth after the epidemic. The company is also actively arranging online business, exploring online and offline integrated development models, and expects online business to account for 30% of revenue in the future. We expect earnings per share for the next three years to be RMB0.25, 0.33, 0.49 respectively, with a target price of HK $9.7, corresponding to the 35x2020 annual forecast price-earnings ratio, which has little room to rise compared with the current stock price and is given a neutral rating.
In 2019, the company newly entered Zhongshan and Jiangmen, increasing the number of cities covered by the company from the past five cities (Shenzhen, Dongguan, Foshan, Huizhou, Xiamen) to seven and 46 new teaching centers. As of December 31, 2019, the company had a total of 100 teaching centers. The number of enrolled students broke through the 100,000 mark for the first time, tutoring hours increased by 36.2% compared with the same period last year, and the average class fee increased by 5.9% from 77.7 yuan to 82.3 yuan. The number of new teaching centers and enrollment students increased significantly compared with the same period last year, driving a substantial 44.3% increase in revenue in 2019. Gross profit margin improved, 4.85 percentage points higher than in 2018.
The epidemic affects revenue in the first quarter, lowering the guidelines for opening stores this year.
Affected by the new coronavirus epidemic, the company's revenue in the first quarter was under pressure. However, the company actively responded and made adjustments, transferring some of the original offline courses to online, and the spring class income still increased by about 10% compared with the same period in 2019. Affected by the epidemic, the company has reduced its plans for new teaching centers this year, from 64 at the beginning of January to 36, 40 in 2021 and 52 in 2022. There will be more than 200 teaching centers by 2022. The key city of the company in 2020 is Guangzhou.
The online layout is accelerated and is expected to account for 30% of the revenue in the future.
Thinking about the music net school began to try at the end of 2018, and this epidemic brings great opportunities to online schools. Because of this epidemic, all the teachers of Sianle passively carried out comprehensive online education training, which made the company find that some teachers have the potential to become excellent online training teachers. The company's online platform uses Classin system, parents are more satisfied with the system, the future may independently develop online training system. For the future development of online business, the company believes that online is an offline supplement, but it is difficult to replace, and expects online and offline complementary and integrated development in the future. Management expects online business revenue to account for about 30% of total revenue in the future.
Profit forecast and valuation
The company's guidelines for the addition of new teaching centers in 20-22 are as follows: in 36-40-52, we expect the company's revenue growth in 20-22 to be 18.3% and 42.3% respectively, and its earnings per share to be 0.25% and 0.33% respectively. The growth rate of earnings per share is 39.3%, 34.4%, 47.1%. Our target price is HK $9.7, corresponding to the annual price-to-earnings ratio of 35x2020.