A two-pronged approach of campus expansion and new campus construction to ensure endogenous growth

In the first half of 2020, Huali Group had 45617 students, and the utilization of Zengcheng campus reached 93%. To ensure sufficient capacity to accommodate the increasing number of students each year, the company is expanding Zengcheng campus and buying Yunfu campus in 2017. The expansion of Zengcheng campus has been largely completed and is expected to be put into use in the second half of 2020. Upon completion, it will be able to increase the capacity of Zengcheng campus by an additional 6100 students for use by Huali College and Huali Vocational College. The construction of Yunfu campus was completed in 2019 and can accommodate 8000 people for Huali Vocational College and technician College. Yunfu campus now has a utilization rate of 25%, and there is huge room for growth in the future. The company is building a new college in Jiangmen, which is expected to be completed in August 2021, with a capacity of 8100 students. We estimate that the total capacity of the campus will reach 52200 students by 2022.

Favorable policies, steady increase in the number of students and tuition fees

In 2019, Huali College enrolled 5545 undergraduate students in the 20 academic year. Under the favorable policy of expanding college enrollment and higher vocational enrollment, we expect that the enrollment of Huali College in 2020 is expected to reach 6400, an increase of 16% over the same period in 2019.

Huali Vocational College is expected to recruit 5775 new students in the 20th academic year of 2019, an increase of 9% over the same period last year. The company is applying for undergraduate courses for some vocational colleges, which will help to further raise the level of tuition fees in the future.

The valuation lags behind the industry; pay close attention to it actively.

We predict that the number of students enrolled in the 21st academic year in 2020Universe will be 48456, an increase of 6.2%. Huali Group is expected to earn RMB 790 million in fiscal 2020, up 16.6% from the same period last year, and its gross profit margin expanded 2.1% year-on-year to 56.6%. The net profit was 270 million yuan, an increase of 20.4% over the same period last year, and the net profit margin was 34.1%. It is estimated that the adjusted net profit for fiscal year 2020 is RMB 290 million. The company's current valuation corresponds to 11.6 times our forecast adjusted net profit for fiscal year 2020. Also in Guangdong Province, higher education groups of similar size, including Kopei (1890 HK) and Zhonghui (382 HK), have an average price-to-earnings ratio of 18.6 times for fiscal year 2020 and 15.1 times for fiscal year 2021. Huali still has a 30% discount compared with its Guangdong counterparts. It is recommended that active attention be paid to it.

Investment risk

1. Acquisition and merger execution risk; 2. Higher education policy risk; 3. The risk of expanding the capacity of the campus.