In recent years, by acquiring 2-3 schools every year to expand the number of students, Chinese Education Holdings (00839-HK) has become the listed higher and vocational education group with the largest number of students in China.

In October 2020, China Education Holdings had about 238000 students from nearly 100 countries around the world.

In the field of higher education, the increase or decrease in the number of students determines the fluctuation of the performance level of an education enterprise. China Education Holdings benefited from the expansion of the number of students, achieving an income of 2.678 billion yuan (RMB, the same below) for the year ended August 31, 2020, an increase of 37% over the same period last year; the adjusted net profit attributable to the owner of the company was 984 million yuan, an increase of 28.7% over the same period last year; and the normalized EBITDA was 1.542 billion yuan, an increase of 37.5% over the same period last year.

This is also the rapid growth of the performance of Zhongjiao Holdings for three consecutive years since its listing. In 2017, more than 85% of the 2.756 billion yuan raised in the listing of the company was spent on foreign mergers and acquisitions and self-construction of the school network, which has been fully utilized and has become the biggest driving force for the company's performance growth.

Wide accumulation of grain and high certainty of performance growth

Although the policy of higher education subdivision track is relatively friendly, the threshold for entry is higher, and the construction of private colleges and universities has higher requirements for funds and qualifications, which makes domestic higher education enterprises begin to evolve to the direction of collectivization in order to pursue scale effects. acquisition has become the main way for private higher education enterprises to expand.

Like Hope Education (01765-HK), Minsheng Education (01569-HK) and other higher education enterprises, Zhongjiao Holdings after listing has started a horse race for epitaxial mergers and acquisitions in order to expand its own strength.

Including Haikou Institute of Economics, which was recently acquired, Zhongjiao Holdings has continuously acquired eight private universities in the past three years on the market, and three private universities in 2019 alone, spending a total of more than 4 billion yuan. So far, CUHK has 13 private institutions, including 11 higher education and professional colleges in China, one in Sydney, Australia, and one university in London, UK.

Zhongjiao Holdings'M & A team has a wealth of experience and has examined more than 500 potential M & A targets since its listing. In the past, the newly acquired schools were integrated smoothly, and the number of students in the school increased after the merger and brought benefits to the company.

In addition, Zhongjiao Holdings has also expanded the campus network through the construction of a new campus. The new campus of Guangdong Baiyun College is currently under construction. The first phase has been completed and put into use in September last year, and the second phase is expected to be completed next summer. In addition, the new campus of Guangzhou Songtian College is about to start. After the two new campuses are completed and put into operation, they will add a total of 56000 students to the company.

It is worth noting that in the 20 academic year of 2019, there were 180000 students in CUHK, the growth rate of which was lower than that of the same period last year, mainly because it had not been incorporated into Haikou School of Economics and the affiliated Art School of Haikou School of Economics. At present, schools in Hainan Province have been consolidated, and the number of students has increased to 238000, an increase of 40 per cent compared with 2019 / 2019.

Thus it can be seen that the growth of students held by CUHK is mainly due to the contribution of epitaxial acquisitions. With the rapid growth of the number of students every year, the company's performance growth certainty is also very strong. From 2016 to 2019, the compound annual growth rate of students enrolled in the company was 33.78%, while the company's revenue grew at a compound annual rate of 41.3%, indicating that 2-3 foreign mergers and acquisitions of schools each year brought simultaneous high growth in the number of students and income.

In the 2020Universe 21 academic year, thanks to the policy's encouragement of private higher education and the strong demand for high-quality education among students, as well as the further expansion of the network of secondary education holding schools, the company was approved to enroll 52000 students, an increase of 75% over the same period last year. The number of registered freshmen is 41200, an increase of 47% over the same period last year.

As the nature of the education industry is a prepaid model, especially the higher education industry and K12 are basically prepaid tuition fees, so the cash flow generated by the business activities of the whole industry is very good. The cash flow of Zhongjiao Holdings is very abundant in the bank. As of August 31, 2020, the total bank balance and cash of Zhongjiao Holdings was 4.367 billion yuan, exceeding 4 billion yuan for two consecutive years. In 2019, the cash and cash equivalents of CUHK Holdings were 3.497 billion yuan, second only to China Oriental Education (00667-HK) in the Hong Kong stock education sector. Therefore, abundant cash flow has become the basis for Zhongjiao Holdings to steadily carry out foreign mergers and acquisitions in recent years.

Goodwill risk needs to be vigilant

Due to the prevalence of mergers and acquisitions in the education industry in recent years, under the pressure of performance commitments, many enterprises have a thunderstorm of goodwill, leaving a "sequela" of mergers and acquisitions.

The 22 A-share education companies incurred a cumulative large loss of 4.74 billion yuan in 2018, mainly due to the impairment loss of assets provided for by goodwill. Until 2019, goodwill declined compared with the same period last year, and the impairment of assets was reversed, resulting in a sharp drop in the cumulative loss of the industry to 11.025 million yuan.

Recently, Sansheng Education (300282-CN), a listed A-share company, has the risk of impairment due to the acquisition of 599 million yuan of goodwill formed by Hengfeng Information, and Hengfeng Information provides for the impairment of intangible assets, resulting in a great change in performance.

In the field of higher education, the rate of return will decline due to goodwill and defects after mergers and acquisitions. For example, after Zhongjiao Holdings acquired eight schools, its ROE dropped from 10.51% in 2017 to 8.35% in 2020.

In the 2019 fiscal year, Zhongjiao Holdings brought as much as 1.566 billion yuan of goodwill due to foreign mergers and acquisitions, ranking second in the Hong Kong stock education sector after the 1.685 billion yuan of livelihood education. In fiscal year 2020, the company's goodwill further increased to 1.792 billion yuan. In addition, the amount of intangible assets brought about by the acquisition is also relatively large, with the company's intangible assets of 2.299 billion yuan in fiscal year 2020, an increase of 34.6% over the same period last year.

These goodwill and intangible assets of Zhongjiao Holdings are listed as non-current assets, and the cumulative amount of both accounts for more than 30% of the company's non-current assets in fiscal year 2020.

As long as the educational enterprises operate reasonably, there will be no risk of impairment of goodwill, but also because of the heavy assets of Zhongjiao Holdings, we do not rule out the variable of impairment.

The higher education industry is an asset-heavy industry with a low turnover rate, and the long-term increase in the number of students is limited by government quota control, school land and buildings, and school utilization saturation, so the ceiling of a single school is not high. the growth logic is not replicable and needs to rely on foreign acquisitions for optimization and integration to achieve rapid growth.

According to the data, there are more than 750 private colleges and universities in China's higher education (excluding secondary vocational schools), and there are less than 100 collectivized operation, and the industry concentration is very low. Policies such as the introduction of the people's Promotion Law and the conversion of independent colleges encourage the industry to continue to focus on leaders such as secondary education holding, so these leaders have the advantages of capital and operation mode.

Therefore, in the next few years, head education enterprises, including China Education Holdings, will continue to expand the enclosure of horse racing. In this case, the goodwill of China Education Holdings may continue to increase.