South China's K12 education service leader, returning to a growth trajectory after double reduction

Excellent Education Group was founded in Guangzhou in 1997, and after more than 20 years of development, it has gradually become the largest K12 comprehensive education service provider in South China. After the double reduction, the company stuck to the essence of education, actively adapted to the new requirements of the new environment, and accelerated transformation in the direction of quality education, full-time review, and vocational education. Operational efficiency improved markedly, and revenue and profit increased rapidly. We expect that in the next three years, the company is expected to continue to benefit from the dividends of improving the regional competition pattern, gradually expanding into the province with brand and teaching and research advantages. The estimated revenue for 24/25/26 is 1.104/2.05/2.585 billion yuan, and net profit to mother is 0.19/0.329/0.393 billion yuan. Comparable to the company's 25-year PE consistent forecast average of 19.26x, taking into account factors such as small to medium market capitalization liquidity discounts for Hong Kong stocks, the high profit elasticity of regional leaders, and the continuous improvement in the overall liquidity of Hong Kong stocks recently, after giving discounts 15x 25E PE, with a target price of HK$6.48, for the first time coverage was given a “buy” rating.

Benefiting from the improvement of the regional pattern, the recovery of revenue and profit is remarkable

After the double reduction, regional supply was drastically cleared, and inventory compliance agencies gave priority to undertaking demand transfers. As a leading brand in the region, the company is expected to quickly regain market share with its high-quality local reputation and drive restorative growth on the revenue side. Furthermore, due to supply shortages in the industry, the company's capacity utilization rate remained at a high level, customer acquisition costs improved significantly before they were reduced, and profit margins were quickly restored. The company's gross margin/net margin reached 46.98%/18.37% respectively in '23, which has surpassed the level of '19 (41.91%/7.36%). As revenue side recovers and scale effects are unleashed, overall operational efficiency and profitability are expected to continue to be better than before the double decline.

The progress of compliance transformation is leading the region. Quality education is expected to become the main driving force for growth, actively exploring the path of compliance transformation, pioneering the launch of nine major quality products, and has passed the first batch of non-disciplinary certifications in Guangdong Province. At the same time, the company accelerated the acquisition of for-profit licenses and obtained for-profit licenses from 10 administrative districts in Guangzhou as of July 24, laying a good foundation for subsequent compliance expansion. Since 23, the company's quality education revenue has shown a rapid growth trend. 24H1 gradually combined the revenue of some campuses that have completed compliance transformation, with a year-on-year growth rate of 320.9%. As the company gradually expands to cities in the province such as Shenzhen, Foshan, and Zhongshan, quality education is expected to become the main driving force for the company's growth in the next three years.

The Guangdong K12 education and training market space is broad, and leading brands have sufficient medium- to long-term development potential. Guangdong education and training demand is relatively concentrated in the four cities of Guangzhou, Shenzhen, Dongguan, and Foshan. Through comparison with South Korea, we found that the number of K12 students enrolled in the four cities of Guangdong is close to South Korea, but there is still a big gap between the participation rate and private education expenditure per student. The Korean private education market will exceed 140 billion yuan in 2023. We estimate that the K12 education and training market size in Guangdong four cities will be close to 30 billion yuan in '23. Assuming that the participation rate gradually approaches before double reduction and the average annual student expenditure gradually approaches South Korea, we expect the K12 education and training market in Guangdong to approach 50 billion yuan in 2030. Based on this, we are optimistic about the medium- to long-term growth potential of Excellent Education as a leading local brand with leading transformation progress.

Risk warning: Market penetration is slowly recovering, competition is intensifying, there is a risk of losing quality teachers and core management personnel, and supervision of literacy education and high school subject training has been strengthened.