According to the intelligent financial APP, Zheshang Securities released a research report stating that K12 summer/third-quarter revenue generally maintained a growth of 20%-40% (K9 is faster than high school, mainly due to the impact of production capacity expansion rhythm). The revenue growth rate in the next quarter is expected to generally slow down, and the profitability continues to differentiate. Considering that the dynamic valuation level of the education and training sector is relatively high in the consumer sector (implying high market expectations), companies with fundamentals should focus on the alignment of production capacity expansion pace and enrollment growth pace in the short term. In addition, private high schools are the first to benefit from the recovery of Hong Kong stocks, as the Fed's interest rate cut cycle begins + central bank stimulus. If Hong Kong stocks experience a general rebound, the undervalued high education and high dividend sector has historically performed well.

Zheshang Securities' main points of view are as follows:

K12 Third Quarter: On the revenue side, the high prosperity of summer and autumn enrollment continues, and profitability varies due to the pace of each company.

The industry supply continues to recover, but compared to the institutional supply before the 'double reduction', there is still considerable room for development. According to the National Off-campus Education and Training Regulatory and Service Comprehensive Platform, the number of non-disciplinary profit-making licenses in primary and secondary education stage increased by 13.8% from January to October 2024 compared to January 2024. Interest-based training licenses are the main type among non-disciplinary training licenses, and the supply of competency training that enhances learning ability and efficiency is still limited, estimated to account for only about 5%, corresponding to an estimated number of institutions in July 2024 of only about 4,600, far less than the number of disciplinary training institutions in K9 before 2021 (about 124,000).

K12 summer/third-quarter revenue generally maintained a growth of 20%-40% (K9 faster than high school, mainly influenced by the pace of production capacity expansion), with the next quarter's revenue growth rate expected to generally slow down, and profitability continues to differentiate. 1) New Oriental: the profit margin of summer education business increased by 2pct as scheduled, guiding that the profit margin of the next quarter during the off-season will be under pressure; 2) TAL Education: the profit margin in the summer exceeded Bloomberg's consensus expectations, also indicating that the profit margin in the next quarter during the off-season will fluctuate; 3) Xueda Education: due to regulatory disturbances in July and the combination of full-time teachers and upfront costs of new stores in the first half of the year, the Q3 profit margin was lower than expected, and the factors affecting Q3 were all short-term variables, closely monitoring Q4 enrollment data.

Investment Advice: Considering that the dynamic valuation level of the education and training sector is relatively high in the consumer sector (implying high market expectations), companies with fundamentals should focus on the alignment of production capacity expansion pace and enrollment growth pace in the short term. It is recommended to prefer/focus on targets with stable and increasing profit margins (within 1-2 fiscal years) and relatively segmented market positioning; theme-oriented companies should prioritize themes/events with lasting continuity, companies whose short-term valuations have not been excessively depleted. Priority should be given to TAL Education (01773), Xueda Education (000526.SZ), Scholar Edu (01769) and other companies expected to have recruitment growth rate still faster than production capacity growth rate, and it is still recommended to pay long-term attention to Beijing Kaiwen Education (002659.SZ) for potential business restructuring and outward expansion opportunities after the rationalization of controlling shareholder rights.

Adult & vocational education: Market environment pressure still exists, waiting for the fundamental turning point, bullish on the resilience of pro-cyclical enterprise training/vocational education symbols, focusing on low-valuation elasticity of high-dividend symbols such as higher education/Eastern Education.

Private higher education sector first benefits from the recovery of Hong Kong stocks. Hong Kong stocks are more sensitive to external liquidity, benefiting from the Fed's interest rate cuts and strong stimulating policies for consumption and capital markets domestically. In the short term, Hong Kong stocks are expected to have elasticity. Medium to long term is still mainly affected by the domestic economy and related loose policies. If domestic policies further strengthen, it is expected to bring further elasticity to Hong Kong stocks. In the last two years, the private higher education sector has benefited from relatively low valuations and high dividend yields. Typically, it demonstrates resilience at the initial stage of the Hong Kong stock market's recovery phase. Currently, the leading stocks in private higher education still maintain relatively high dividend yields despite a slight decline.

Public examination demand is growing moderately, facing competition and market decentralization, leading companies seek steady and healthy development. The number of applicants for the National Examination/Provincial Examination in 2024 increased by +13%/27% yoy (actual growth rates may differ from the growth rates in statistical data). After 2021, with the release of market share and famous teachers by leading companies, small and medium institutions have rapidly emerged, not only the traditional offline regional brands but also commonly seen on platforms like Douyin, Xiaohongshu, WeChat video accounts, etc. In the context of market decentralization and the marginal decrease in customer payment levels, leading companies are seeking to improve product capabilities and reduce operational leverage, focusing on overall stable growth and profit margins, rather than quick gains.

Enterprise training trillion-dollar track: Action Education's major customer strategy, focusing on resources to seek more stable repeat purchases and growth stability, offsetting the impact of reduced payment ability and willingness of small and medium-sized enterprises. However, major customers may make installment payments according to the amount of large contracts, leading to a gradual rhythm difference between actual receipts progress and contracted amounts.

Other vocational education: Oriented towards employment, the growth rate of enrollment is influenced by the employment rate, and the income end is expected to remain under pressure due to macroeconomic conditions. Keep an eye on individual stock inflection points.

Performance review: In Q3, influenced by macroeconomic conditions, pro-cyclical enterprise training/vocational education's income end remains under pressure, but attention should be paid to individual stock differentiation. Companies like Fenbi (02469) and China East Education (00667) are expected to show quarter-on-quarter improvements in H2 income performance.

Investment advice: The Fed's interest rate cut cycle begins + PBOC stimulus, if Hong Kong stocks rebound as a whole, the low-valuation high education high-dividend sector has historically performed well in previous market cycles. Currently, China Edu Group (00839)'s FY24 dividend yield has fallen from the 8%-10% range to 6.5%-7%, New Oriental (02001) has fallen from a bottom 16% dividend rate to 14%. If Oriental Education's autumn recruitment accumulatively normalizes year-on-year, the current corresponding 24-year dividend rate is 8.6%, also with good odds. A-shares Action Education (605098.SH), Chuanzhi Education (003032.SZ) have high brand barriers in segmented tracks, and are expected to benefit from the recovery of small and medium-sized enterprises/IT recruitment, potentially bringing dual benefits of profits and valuation Davis effect.

Risk warning: Enrollment and income growth lower than expected; Profit margin release lower than expected; Risks of changes in enrollment exam policies; Risks of changes in macroeconomic conditions and slow profit registration progress, etc.