Key points of investment:

The company is a leading provider of high-quality higher education in central China, and we expect the company's growth to be stable.

As the profitability of the company's schools progresses steadily, we believe that the company's policy risk valuation discounts are expected to narrow, and the company's valuation is expected to continue to recover.

The company is a leading provider of high-quality higher education in central China

The company has school divisions in Henan, Hubei and Jiangsu, and is the largest higher education provider in central China.

As of the end of February 2023, the company operated 4 schools in Henan and 2 schools in Hubei, and was in the process of acquiring the rights of the organizer of a school located in Jiangsu. As of the end of February 2023, the number of students enrolled in the company was 113,900, with a reporting rate of over 96% for 3 consecutive years, and an employment rate of 91.4% for 2021/2022, which is higher than the national average.

Higher education policies continue to be favorable. The transformation into a for-profit system is steadily advancing the “Public Promotion Law” and the “Public Promotion Law Enforcement Regulations” clearly indicate that the state supports private higher education, and also requires preferential policies for education providers in terms of taxation, land, and other related policies. The transformation of the company's schools into for-profit businesses is progressing steadily.

Well-known enterprises have jointly established school-enterprise cooperation, and the high employment rate has boosted the number of students and income. The company has jointly established school-enterprise cooperation with more than 700 well-known leading enterprises, promoted implementation of practices, and helped students find jobs better. The company attaches great importance to building a teaching force and provides courses that meet the needs of society. Against the backdrop of macroeconomic fluctuations, the company's schools are still able to maintain a high level of employment rate, are widely recognized by students and enterprises, and have won a good reputation. The company's enrollment has grown at a compound rate of more than 15% over 6 years.

Profit Forecasts, Valuations, and Ratings

We predict that the company's operating income for 2023-2025 will be 14.97/17.30/2,069 billion yuan, a year-on-year growth rate of 14.38%/15.50%/19.60%, a three-year CAGR of 16.47%, a three-year CAGR of 16.47%, net profit of 6.71/804/959 million yuan, a year-on-year growth rate of 21.58%/19.74%/19.26%, and EPS of 0.56/0.67/0.80 yuan/share, and a 3-year CAGR of 20.19%. The DCF absolute valuation method measured the company's value of 8.54 HKD per share. Referring to the company's growth, location advantages, and Hong Kong Stock Connect expectations, we gave the company 0.6 times PEG in 2024, corresponding to 12 times PE, target price 8.73 HKD, corresponding to the Hong Kong dollar exchange rate 0.9204, covering the “buy” rating for the first time.

Risk Reminder: 1. The promotion of for-profit schools falls short of expectations; 2. Macroeconomic fluctuations; 3. Risk of worsening of the competitive landscape; 4. Risk of declining teaching quality; 5. Risk of falling short of expectations when purchasing school benefits