Rooted in Guangdong for more than 20 years, the excellent education group was established in Guangzhou in 1997 and listed on the main board of the Hong Kong Stock Exchange in 2018. According to the company's prospectus, the company is the largest K12 extracurricular education service provider in South China and the fifth largest in the country. In 2017, the South China market share was 1.6%, and the national market share was 0.3%. The company's revenue scale shrunk sharply after the implementation of the double reduction policy. Currently, revenue has begun to recover rapidly. 2023H2 revenue was +34.9% year-on-year. On the profit side, 2023H2's gross margin and net profit margin both hit record highs. The gross margin reached 53.3% and the net profit margin to mother reached 23.4%. The boom in the quality education circuit combined with high school training policies is expected to improve marginally, and the company's revenue and profit are expected to continue to recover to the level before the double decline.

The three major business segments are developing in a balanced manner, and both declines do not change the upward trend

Quality education: Give full play to the advantages of language and programming, and there is plenty of momentum to grow the scale of quality education. Since 2015, the company has been exploring quality education in the form of investment and self-employment. After the double reduction, it was rapidly upgraded. Currently, nine types of literacy courses have been formed. Among them, language and programming are the company's star courses. 2023H2's quality education business has achieved significant growth. Revenue increased 251.6% year on year, driving annual revenue growth of 71.1%. We believe that the quality education industry has begun to spring, and the quality education business is full of momentum for long-term growth.

Counseling program: The number of high school students is stable, and the repair trend continues. The number of students enrolled in various school segments in Guangdong Province has maintained a positive growth rate of around 5% in 2018-2022. It is expected that in at least the next two years, the company will still benefit from the increase in business volume brought about by the rapid increase in the number of high school students. At the same time, the training penetration rate is also expected to increase as competition for college entrance examinations intensifies. We believe that as the K12 leader in Guangzhou and even South China, the company will maintain its leading position in the context of scarce high school education and training licenses, and it is expected that the company's tutoring program performance will steadily recover.

Full-day preparation test: extensive centralized layout, stable performance growth. The company's full-day exam preparation business mainly includes college entrance examination repeat schools, cultural course tutoring for arts and sports students, and three-year vocational colleges for junior year graduates, mainly in the Guangshen region. In addition to more than 20 years of teaching experience, the Excellent Full-Day Examination Preparation Service also adds technological empowerment, with the “Excellent Wisdom System” and “Life Growth System” as the core to empower college entrance examination students through science and technology. In terms of revenue generation, full-day exam preparation revenue grew steadily, with a year-on-year increase of 25.2% in 2023, making it the company's largest business share.

Profit forecasting

Quality education and high school counselling are expected to support the rapid growth of the company's overall performance. We expect the company's 2024-2026 revenue to be $6.6/8.8 billion, net profit to mother of $1.2/1.9/250 million, and earnings per share of $0.14/0.23/0.30, corresponding to the closing price of HK$3.01 on March 28, 2024, and PE 19.05/12.11/9.16X (HKD/RMB exchange rate 0.9092:1), respectively.

As a K12 education leader deeply involved in the Guangdong region, we believe that its performance is highly flexible under marginal policy improvements. Based on our profit forecasts, the company's price-earnings ratio for 2024-2025 is significantly lower than that of comparable companies with similar businesses. We are optimistic that its performance will also drive valuation repair. For the first time, coverage was given, and a “gain” rating was given.

Risk warning

Quality education business demand falls short of expectations; competition in the quality education industry intensifies; high school business policy risks