On September 2, the Ministry of Education and other five departments issued a circular entitled "opinions on further strengthening and standardizing the Management of Education fees", which led to a sharp fall in the share price of Hong Kong K12 Education Company. We believe that this notice is consistent with the previous draft submitted for review by the Civil Promotion Law and will not have a practical impact on the operation of the school. After 18 years of manuscript review, K12 Education Company's self-construction, expansion, acquisition, dividend, increase in tuition fees and other activities were carried out normally, without any hindrance or restriction from the local government. Finally, we are optimistic about Chengshi's top level of running schools and future expansion plans, maintaining the target price of HK $4 and buying rating.

Summary of the report

Affected by the epidemic, net profit increased by 3 per cent in the first half of 2020. In the first half of 2020, the company's revenue was 880 million, an increase of 17% over the same period last year, and its net profit was 240 million, an increase of 3% over the same period last year. The gross profit margin reached 43%, down 2 percentage points. The decline in the company's gross profit margin was due to a reduction in kindergarten tuition and university accommodation fees as well as a decline in profit margins for canteen services as a result of the epidemic.

A large number of new schools will be put into operation in September, with more than 58000 students expected to enroll in the 2020 academic year.

In September 2020, the company will open 16 new schools and begin to enroll the first batch of students, and another 23 schools are under construction. With the beginning of the new semester in September, students have reported that after enrollment, the total number of students is expected to exceed 58000, and the number of degrees in built schools is more than 97000.

We will actively promote the conversion of independent colleges and for-profit schools, and there will be plenty of room for tuition adjustment in the future. Chengdu College of Sichuan Foreign Studies University outside Chengshi is an independent college, the company has begun to transfer work, and has paid a break-up fee of 125 million yuan to Sichuan Foreign Studies University, which is expected to be completed in the first half of 21 years.

At the same time, the company has applied to change all its high schools and universities to for-profit schools. We believe that with the completion of the conversion and for-profit transformation of independent colleges, there will be a huge increase in the company's high school and university tuition and places. In terms of K9, due to the impact of the epidemic, the tuition fees of K9 schools remain generally unchanged in 2020.

The policy has no impact on the operation of the company. The Ministry of Education and other five departments recently issued a circular entitled "opinions on further strengthening and standardizing the Management of Educational fees." it is proposed that "non-profit private school operators and non-profit Chinese-foreign cooperative operators are strictly prohibited to obtain income from school income such as tuition fees in various ways, distribute school balance (surplus property) or transfer school income through related party transactions." We believe that this policy is consistent with the content submitted for review by the previous Civil Promotion Law and will not have a practical impact on the operation of the school. After 18 years of manuscript review, K12 Education Company's self-construction, expansion, acquisition, dividend, increase in tuition fees and other activities were carried out normally, without any hindrance or restriction from the local government.

Maintain the target price of HK $4 and buy rating. We are optimistic about the company's top school-running level, in line with the expansion of light assets, there is huge room for development in the future. Maintain the target price to HK $4, equivalent to 20 times forecast earnings in 2021, 67 per cent higher than the current price, and maintain the buy rating.

Risk hint: policy risk; worsening epidemic situation