A private academic education group leading the pace of transformation. Since the first school was established in 2002, the company has been committed to building and operating K12 academic schools and replicating them across provinces. After the implementation of the Civil Promotion Law in 2021, compulsory education schools were unable to merge through related transactions. The company adjusted accordingly to operate K9 schools outside the table; the business on the table focuses on high schools, supplemented by logistics services (restaurants, product sales), literacy courses, study tours associated with K12 schools, and exploring K12 school hosting services that export teaching capabilities to the outside world. By the end of FY2023, the company had served more than 100,000 K12 students, including 37,000 high school students (including hosting); 33 self-operated high schools. With FY2023, the company achieved revenue of 2.30 billion yuan/ +160%, or 177% of FY2020; net profit to mother was 330 million yuan/ +246%, reaching 88% of FY2020, with obvious transformation results.

The private high school policy is becoming clear, and there is a strong demand for diversified studies. Private high schools are not compulsory, and the regulatory attitude is milder than K9. Under strong demand for diversified education, private high schools have obvious characteristics. The penetration rate is expected to increase steadily, compounded by the delayed release of the demographic dividend, and strong market demand. The pattern is scattered, but the teaching ability verification cycle for private high schools is long and the barriers are high. Leading companies hope to stand out with the brand moat.

High school tuition fees+accommodation revenue is growing rapidly, K12 companion businesses are expanding steadily, and K12 school trusteeship explores growth potential outside of self-operated schools. We estimate that FY2023 high schools, K12 companion businesses (restaurants/product sales/literacy/study tours), and hosting account for 26%/24%/21%/17%/9%/2% of revenue. The high school sector is the basic growth market, benefiting from: 1) Increased campus utilization: We estimate that the current utilization rate of self-operated high schools is only 27%-37%. With the support of high-quality schools, the utilization rate will gradually climb. The utilization rate of the existing 33 high schools will be close to 100% in 2028. 2) Epitaxial expansion: The company plans to add 3-5 self-operated schools every year, aiming for a total of 40-50 by 2027. Based on the above estimates, the company will add about 10,000 new self-employed high school students every year, and the total number is expected to reach 6-8 million in 2027. 3) Tuition fee increase: The proportion of students studying in diverse fields has increased and the average tuition fee is expected to increase by 5% per year at an average price of 30,000 yuan. Taken together, the estimated income of high schools in 2024-26 is 9.2/14.4/2.05 billion yuan. The K12 school companion business is currently mainly aimed at internal K12 school students. Considering the high certainty of internal student growth, this segment is expected to expand steadily. It remains to be seen whether the escrow service can be used to achieve external export in the future. The ability of K12 school trusteeship to improve the teaching quality of third parties continues to be verified, and customers are growing rapidly. On top of the existing 19 school segments, it is expected that 30-50 new classes/year will be added in 2024-26, achieving business revenue of 0.5/1.6 billion yuan in the corresponding year.

Risk warning: policy changes, declining teaching quality, brain loss, failure to develop incremental business.

Investment advice: With excellent academic results and diverse further education services, the number of students within the company is steadily climbing. The high school and K12 companion businesses have excellent growth certainty and flexibility, and the escrow business is also expected to increase profit margins. The estimated net profit for 2024-26 is 5.2/7.3/1.01 billion yuan, CAGR 39%, and EPS 0.24/0.34/0.47 yuan. Considering the high degree of operational certainty, we gave the company a 2024 PE valuation of 20-22x, with a target price of HK$5.34-5.90. There is still a 22-34% increase from the latest closing price, giving it a “better than the market” rating. Furthermore, the company is expected to return to the Hong Kong Stock Connect. It is recommended to focus on opportunities to improve liquidity.