Key points of investment
China's leading private K12 academic education group has a high rate of expansion with certainty: Tianli Education is the leading private education group in China. Starting from Luzhou, Sichuan, it has now expanded to 13 provinces and 31 cities across the country. As of December 2020, the company had 45 schools (including reserve schools) across the country, with 56,000 students enrolled. Plus, reserve schools can accommodate more than 120,000 students. In 2019, revenue was 900 million yuan, net profit was 265 million yuan, and the revenue CAGR in 15-19 reached 43%. The expansion rate of 5-10 schools was maintained every year, and growth certainty is high.
The company mainly lays out regions with underdeveloped education resources in third- and fourth-tier cities, which is of great significance in alleviating the problem of local students enjoying quality education nearby. It is also precisely because they can enjoy high government subsidies, which drives the company's rapid expansion: the more flexible selection and training mechanism of private schools determines that they can provide better curriculum, and China is currently under high pressure on local education financial expenditure, and many places are facing the problem of loss of students due to their inability to provide quality education. The local authorities have introduced rich experience in running schools, and private schools with strong teachers are consistent with their goals for education development and construction. Therefore, the company has introduced rich experience in running schools, and the company's goals are consistent with the original purpose of education development and construction. It has strong bargaining power when negotiating with local governments. Most of its schools have received government subsidy rates of 50% or more, effectively relieving the pressure on the company's upfront investment and ensuring the company's rapid expansion.
Standardized brand output and market-based incentive mechanisms create strong offsite replication capabilities: every time a new school is opened, the group will recruit in advance, unify training, and eventually export a core management team of 10 people (including core personnel such as school district principals, vice-principals, etc.) to ensure the uniform quality of schools in each district, while the local authorities are assigned middle level positions to manage specific matters and adapt to local conditions. Furthermore, for every school, the Group has a market-based incentive mechanism from the top down to fully motivate every employee.
High enrollment rate and high reputation continue to improve the company's profitability: A number of schools built by the company in 15-16 have fully matured, and the company's profitability continues to improve. Moreover, these mature schools have already been tested and performed well in entrance examinations. The college entrance examination rate is over 60%, and the undergraduate rate is over 90%, far higher than the average in Sichuan Province. With word-of-mouth schools alone, you can enjoy a steady stream of student registration. The company's sales expenses are less than 3% all year round, showing a trend of continuous improvement. Although the company also concentrated on building a number of new schools in 19-20, we expect the company to maintain a high level of profit as government subsidies are in place.
Profit prediction and investment rating: Tianli is a leading enterprise in K12 education. It is an effective complement to quality education in third- and fourth-tier cities. It is of great significance to the development of local education. High reputation+standardized management team output+high government subsidies. Compared with other K12 private schools, Tianli has stronger outreach expansion and offsite replication capabilities. Growth certainty is high, and it can maintain a student growth rate well above the industry average (+35% vs. industry average +10%). We expect the company to achieve a net profit of 3.7/553/750 million yuan in 2020-22, with a year-on-year growth rate of 41%/42%/42%. The closing price on the 27th corresponds to PE 45/32/22 times in 2020-22, respectively. It was covered for the first time and gave it a “buy” rating.
Risk warning: Enrollment falls short of expectations, repeated epidemics, and the Public Promotion Law has not yet been implemented, etc.