The leading K12 private education service provider in China has transformed to focus on for-profit high school business. The company was founded in 2002. Early schools are mainly K9, and have won many honors such as China Education Innovation Demonstration Unit and China Education Industry Benchmark Group. Since its listing in Hong Kong in 2018, the company has relied on nearly 20 years of school accumulation and good reputation to promote offsite expansion. Currently, it has 50 schools across the country, covering 16 provinces. During this period, the company relied on its reputation for high-quality further education and successfully transformed into a for-profit high school after the promulgation of the implementing regulations of the Public Promotion Law in 2021. FY23 achieved revenue of 2.32 billion yuan/year over year, exceeding the historical peak in 2020; achieving net profit of 330 million yuan/year over year +246%, recovering to 92% in 2020.

Population and policies resonate, and private high school education still has plenty of room for development. Although the number of high school students enrolled in China may peak as early as 2029, we believe that the domestic high school demographic dividend will continue in the context of current policies encouraging the orderly expansion of general education enrollment and promoting the integrated development of general employment. Taking into account favorable factors such as domestic investment in education and local financial conditions, as well as the Public Promotion Law itself, which imposes few restrictions on the upper secondary level, we believe that private education capital still has considerable room for development at the high school level. We estimate that the domestic private sector market will exceed 200 billion yuan by 2031, with a CAGR of about 7.8%.

Company highlights: Based on the ability to run schools, “one branch, one branch” opens up room for growth: the first-class rate of the company's mature high schools far exceeds the average in Sichuan Province, and is also better than the average of ordinary high schools in Beijing and Shanghai. Combined with the sufficient number of students in the original K9 class, the trend of rapid increase in enrollment after the company transformed into high school can continue. As of 1H24, the company's school network has a capacity of 200,000 people. Currently, there are only 100,000 students enrolled, +22% YoY, of which only 37,000 are high school students/+44% YoY. Considering the company's excellent ability to run schools, compared with the average level of students enrolled in ordinary high schools across the country, we estimate that the company's high school students still have room for growth of more than 80%. In addition, the company's many businesses are developing rapidly. In addition to catering and product sales revenue, which is expected to follow the steady increase in the number of students enrolled in school, the company also provides students with various value-added education services, including comprehensive literacy, competitions, international studies, and art examinations, to meet students' differentiated education needs, and is expected to drive an increase in comprehensive education service fees per student in the future. In terms of outreach, the company is still expected to add 3-5 high schools every year; at the same time, the company will also rely on its reputation for running high-quality schools to accelerate the expansion of its entrustment management business. Currently, 14 schools and 20+ school segments have been signed to target Hailiang Education's 190 trusteeship schools. The company also has plenty of room to expand its asset-light trusteeship business in the future.

Investment advice: We expect the company's FY24-26 net profit to be 550 million, 8.1 billion, and 1.11 billion, respectively, corresponding to FY24-26 PE, 17X, 12X, and 8X, respectively. Considering that the company has sufficient momentum for endogenous and epitaxial growth, its current growth and valuation are more attractive than those in the industry. It was covered for the first time, and a “recommended” rating was given.

Risk warning: Risk of enrollment progress falling short of expectations; risk of new business development falling short of expectations.