Guangdong K12 education leader, growth restoration

Thinking Le is a leading K12 after-school education service provider in South China. It was founded by Mr. Chen Qiyuan in 2012. Over the past 22 years, Thinking Happy has adjusted its strategy in a timely manner and transformed to quality education. With its reputation and excellent service, it has encrypted its outlets in Shenzhen, and its revenue and profit have continued to grow. We expect the company's 24-26 revenue to be 0.825/1.113/1.393 billion yuan, and net profit to mother 0.17/0.232/0.307 billion yuan. Considering that although the company is the target market value of Hong Kong stocks, it has significantly benefited from clear supply in the Shenzhen market and has high profit flexibility, we are relatively comparable to the average valuation value of the company (20.30x), giving a slight discount of 19x 25E PE, with a target price of HK$8.68, which covered the “buy” rating for the first time.

Transformational literacy continues service advantages, and high schools introduce high-quality teachers

In terms of service, it has formed a differentiated reputation in the Shenzhen market by relying on its perfect incentive system and service capabilities. The company successfully mobilized teachers' own subjective activism in various aspects of customer acquisition, teaching, service and renewal. After the transformation, it continued the tradition of quality service and guaranteed the company's low sales cost rate. At the teaching level, literacy products such as Chinese literature, logical thinking training, and scientific literacy have been launched to enhance students' comprehensive abilities. At the same time, at the high school level, high-quality teachers are actively introduced to improve the quality of high school teaching. Over the past 24 years, the growth rate of the high school business has been significantly higher than the growth of the literacy business.

Shenzhen continues to encrypt, extend Guangzhou to seek development

Within half a year after the off-campus training supervision policy, offline subject teaching and training institutions in Guangdong Province were reduced by 96% (as of January '22), and 919 training institutions were shut down in Shenzhen according to law (as of October '21). Under the general trend of compliance management, the company successfully completed its own business transformation. By mid-'24, the company had already set up 145 outlets in Shenzhen. Currently, the Luohu and Futian regions are significantly encrypted. Most of the Guanwai outlets are located around subway stations. The company plans to return to Guangzhou for the 25-year winter vacation. Considering the company's differentiated product and service capabilities, it is expected to further open up room for revenue growth.

Deeply cultivate the layout of the Greater Bay Area, and industrial service space can be expected

The demand for off-campus training is comprehensive, and the transformation of literacy is in line with industry trends. Demand for education and training in Guangdong is relatively concentrated in the four cities of Guangzhou, Shenzhen, Dongguan, and Foshan. Through comparison with Japan, we found that there is still a certain gap between the participation rate in the four cities of Guangdong and the average student expenditure on private education in the four cities of Guangdong and Japan. The size of the Japanese education and training market in 2021 is about 80 billion yuan. We estimate that the K12 education and training market size in Guangdong Sicheng will be about 30 billion yuan in '23. If we carefully assume that the participation rate gradually approaches Japan and the average annual salary increases gradually (refer to the GDP gap per capita), the long-term market size of the four cities in Guangdong can reach 50 billion yuan. We are optimistic that the company will continue to explore demand space in Guangdong.

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.