Key points of investment

Affected by the epidemic, the number of students enrolled and revenue of the company in the first half of 2020 was 26,000 and 770 million yuan respectively, 8.2% and 11.3% year-on-year respectively:

2020H1 achieved revenue of about 770 million yuan, a year-on-year decrease of 11.3%; gross profit of 270 million yuan, a decrease of 23.7% over the previous year; gross margin fell 5.8 percentage points to 35.6% from 41.4% in 2019H1; and realized net profit of 530 million yuan, a decrease of 29.6% over the previous year. The decline in the company's revenue and net profit was mainly due to the impact of the pandemic. The number of students enrolled in regular classes at 2020H1 was 260,000, down 8.2% from 284,000 students of the same caliber enrolled in the same period last year. The total number of tutoring hours in regular classes dropped by 12.9%, and the number of training centers was the same as at the end of 2019, reaching 265.

Under the pandemic, excellent education bucked the trend to increase sales expenses and introduced more than 600 outstanding teachers, confirming its determination to expand the region. The company's low-cost classes have good drainage results.

The sales expenses of 2020H1 increased from about 60 million yuan in the same period last year to close to 90 million yuan, an increase of 50% over the same period last year. The low-cost class strategy has achieved remarkable results. The number of short-term classes in the first half of 2020 increased 123.6% over the same period last year, and the supplementary income of classes in Shenzhen increased 14.7% year-on-year. Since the resumption of classes in July, the number of students enrolled in the regional market outside of Guangzhou increased by 52.4% year-on-year. Up to now, the conversion rate for low-cost summer courses is 30%, and it is expected that after the summer is over, the conversion rate will return to the level close to 50% before the pandemic.

Maintain the buy rating and maintain the target price of HK$4.8:

We remain optimistic about the company's regional expansion. The reason is that among regional curriculum training institutions, the teaching quality of excellent education is high (more than 80% continuation rate, close to 50% conversion rate), and “big language” characteristics are remarkable. Facing competition between the two giants in Guangzhou in the past did not show fatigue. Furthermore, the company has strengthened incentives through partnership mechanisms and other measures, increased investment in sales expenses, and focused on attacking the Shenzhen market.

At present, the company's regional expansion has achieved initial results, and it is hoped that the expansion will accelerate after establishing a reputation in Shenzhen.

We lowered the company's profit forecast. The estimated revenue for 2020/21/22 was 1,77/ 24.5/2.99 billion yuan, respectively, and the net profit of the mother was 0.88/190/260 million yuan respectively, corresponding to EPS 0.112/0.242/0.331 yuan. Currently, the company's current price of HK$3.29 corresponds to 12.2 times PE and 2.6 times PB in 2021, which is a low valuation. The target price was maintained at HK$4.8, corresponding to 2021E earnings per share 17.8 times, maintaining the buy rating.