Deeply involved in the Shenzhen K12 market, it has successfully transformed Quality Education Thinking Education Group was established in Shenzhen in 2012 and listed on the Hong Kong Stock Exchange in 2019. According to the company's prospectus, the company is the second largest K12 extracurricular education service provider in Shenzhen and the fourth largest in Guangdong Province. In 2018, Shenzhen's market share was about 2.5%, and Guangdong's market share was about 0.9%. After the double reduction policy, Xile actively transformed and launched a variety of non-subject literacy courses starting in the second half of 2021.
Throughout 2023, the company's revenue from literacy courses increased from 196 million yuan in 2021 to 520 million yuan. Compared with academic exam preparation courses before the double reduction, about 91% of the company's revenue in 2023 came from non-academic quality courses and others, and about 9% from academic education courses. The revenue and revenue share of the quality education sector increased significantly.
Quality education policies have been marginally improved, and the scale has expanded rapidly
Since the implementation of the double reduction policy, education in K9 subjects has been fully clarified. The “Opinions on Regulating Non-Disciplinary Out-of-School Training for Primary and Secondary School Students” issued at the end of 2022 requires that non-subject training be a useful complement to school education. The number of students enrolled in the company's quality education business grew rapidly, reaching 239,000 in 2023, an increase of 38.15% over the previous year.
The average price of course hours and the average number of training hours per student have remained stable since 2022, and the customer unit price is close to 2,200 yuan. The company closed some campuses after the double reduction. We believe that in the current context of the high quality education boom, the company is expected to rapidly expand its scale, maintain a high increase in the number of trainers, and combine a new business layout with high added value education tourism and international courses to drive the growth of quality education revenue.
The number of high school trainees is stable, and the number of participants has been restored
On the demand side, students enrolled in various school segments in Guangdong Province have maintained positive growth, and middle school students will maintain a growth rate of about 5% in 2018-2022. We expect that in at least the next two years, the company will still benefit from the increase in business volume brought about by the increase in the number of high school students. At the same time, the training penetration rate is also expected to increase due to increased competition in college entrance examinations. The number of high school participants recovered rapidly in 2023, with a year-on-year increase of 56.87% to 23,000. The average price of a single class hour for subject tutoring and the number of training course hours per student were basically stable, slightly higher than quality education. As demand for high school training increases and the company's campus expands, the subject tutoring business is expected to pick up at an accelerated pace.
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 revenue for 2024-2026 to be $8.1/11.9/1.78 billion, with net profit due to mother of $1.4/1.8/260 million, and earnings per share of $0.26/0.33/0.46, corresponding to the closing price of HK$4.23 on April 2, 2024, and PE of 14.91/11.74/8.29X (HKD/RMB exchange rate 0.9066:1).
As a K12 education leader focusing on Shenzhen, we believe that it is expected to expand rapidly as industry demand expands. Based on our profit forecasts, the company's price-earnings ratio in 2024-2025 is lower than that of comparable companies with similar businesses. We are optimistic about their performance and the increase in industry sentiment will drive a boost in valuation. 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