We co-hosted an investor conference with outstanding education management. Investors focused on opportunities for industry integration, the company's operating performance, and school resumption times. Although the education business has been affected by the pandemic in the short term, we anticipate that industry integration may accelerate. The company will be able to increase its market share and accelerate expansion through acquisitions. Future development will focus on expanding its business in the Greater Bay Area and moving towards the development of an online and offline integration model. Maintain the buy rating.
The schedule for schools to resume classes is yet to be determined. According to Guangdong Province's policy, primary and secondary schools will gradually resume classes in May, while the time for kindergartens to resume classes is yet to be determined. K12 extracurricular training courses will resume at the same time as kindergartens. This year's summer vacation starts no later than August 1, which is 2-3 weeks later than last year. However, we think the company can offer short courses in July to make up for lost coaching hours due to shortened summer vacations.
Accelerate industry integration. First, many small educational institutions without the ability to teach online have been forced to close due to cash flow issues. The K12 extracurricular education industry market in Guangdong Province is fragmented. The top five educational institutions accounted for 7.6% of the total market share in 2018, and leading educational institutions have room to seize market share. Second, Education Excellence is looking for acquisition targets within and outside Guangdong Province (such as companies with annual revenue of up to 100 million yuan). Education Excellence has a strong balance sheet (cash and investments reached RMB 1.3 billion by the end of FY19) and aims to find synergistic targets, such as companies in regions it has not yet covered. In addition, rents fell during the pandemic, and some educational institutions cut teachers' salary expenses or required teachers to leave their jobs without pay. We see Education Excellence as an opportunity to choose advantageous locations to expand its network of education centres and hire quality teachers at a lower cost.
FY20 outlook forecast. The online conversion rate for the winter vacation in small classes and the conversion rate for the spring course were ideal, reaching 85% and 82% respectively, but the temporary closure of schools affected the recruitment of new students. We expect the company's revenue to fall high per unit in the first half of this year and rise by more than 20% in the second half of this year.
Maintain the buy rating. Our target price is HK$5.14, which corresponds to 18.7 times the average earnings per share forecast for FY20 and FY21. Catalysts: (1) enrollment rates are better than expected; (2) mergers and acquisitions. Risks: (1) uncertain factors of the epidemic; (2) recovery in the second half of the year was worse than expected; (3) government policies.
