Key points of investment
The company is a regional K12 extracurricular education and training leader with the largest market share in South China:
Excellent Education Group is the largest K12 curriculum training service provider in Guangdong Province and the fifth largest in the country. It provides K12 class supplements, personal supplements, quality education, and full day exam preparation courses. As of December 19, the company operated a total of 265 training centers in 10 cities in China, mainly in the Guangdong-Hong Kong-Macao Greater Bay Area, mainly Guangzhou. The number of students enrolled in the company in 2019 was 790,000, and revenue reached 1.83 billion yuan. The company implemented an expansion strategy that deepened into South China and covered the whole country, differentiated competition with a strong language strategy, comprehensively accelerated the layout of education OMO, and a stable business style.
Guangdong Province has significant location advantages, the status of language subjects has improved, and provincial coordination has gradually been implemented in the secondary school entrance examination:
The K12 extracurricular training market in Guangdong Province accounts for 10.5% of the country, and the scale CAGR has reached more than 11%, and the participation rate is higher than that of the whole country. Continued population inflows have led to low overall enrollment and undergraduate admission rates, and higher per capita disposable income provides a strong willingness and ability to pay for K12 curriculum and training services. At the same time, college entrance examination reform, curriculum reform, and the unification of language textbooks for elementary, middle, and higher education have guided the advancement of the status of language subjects. The provincial education department is also gradually strengthening the coordination of secondary school entrance examinations at the provincial level, which will help companies expand their language advantages and enjoy the dividends of increased concentration.
Differentiated competition is carried out with a strong language strategy, and the high reading rate and conversion rate highlight the company's teaching quality and reputation advantages. The teacher retention rate and R&D investment reflect internal strength, with a focus on attacking the Shenzhen market:
Excellent education focuses on strong language strategies, and language courses account for 30% of revenue. The retention rate continued to increase, reaching 83% in 2019 (about 80% in the Shenzhen campus), and the conversion rate of low-cost classes reached 50%, which is at a high level in the industry, reflecting the excellent quality of teaching. In terms of operation, the average annual R&D investment in the past three years has reached more than 150 million, and the teacher retention rate has increased to 85%, showing the company's internal skills in teaching, research, and management. In terms of business expansion, the company will strengthen the penetration of outlets in the Greater Bay Area, focus on expanding the Shenzhen market, implement a partnership mechanism in Shenzhen, and adjust the organizational structure. It is estimated that 40-50 new training centers will be opened each year from 2021-22.
The initial coverage gave a buying rating, with a target price of HK$4.8:
We believe that the company's current valuation reflects the gap between it and the national dual leaders, as well as the difference in growth with regional leaders in Shenzhen. It is expected that the company will continue to grow steadily. The net profit of 20/21/22E is 137/224/301 million yuan respectively, and EPS is 0.174/0.286/0.384 yuan respectively, corresponding to the current price of 15.8/9.7/7.2x PE, respectively. We gave the company 15 times the target PE in 2021. The corresponding target price was HK$4.8, with room for an increase of 55.2% from the current price, covering the “buy” rating for the first time.
