On June 22, 2021, Huaxia Audiovisual Education announced the acquisition of 100% of the shares of the Olympic College of the Nanjing Institute of Sport. The purchase consideration was RMB 450 million. The transaction will be completed through a debt-based acquisition. First, Huaxia Audiovisual Education will pay 250 million yuan to repay the Olympic College debt, and acquire the school's shares for 200 million yuan. The 21-year valuation corresponding to the purchase price was about 50 times the price-earnings ratio and 9.6 times the price-earnings ratio. The company expects to complete the merger of the Olympic Academy by the end of August 2021.

There is plenty of room for endogenous growth. The Olympic College of Nanjing Sport University was founded in 2011 and is a private second-level college located in Nanjing.

After the merger and acquisition is completed, the Olympic Academy will be divested from the Nanjing Institute of Sport and incorporated into the Nanjing School of Communication, which is a subsidiary of the company, and will continue to operate independently in the form of a second-level college. In 2020, the school's revenue reached 47.1 million yuan and net profit reached 3.74 million yuan. As of May 2021, the number of students enrolled at the Olympic Academy is around 3,000. Olympic College has 550 acres of campus land. Based on the calculation that each mu of land can accommodate 200 students, the school has a capacity of about 11,000 people. If it can be fully enrolled, the number of students enrolled will increase by 267% compared to the current size.

The Huaxia Audiovisual Program will achieve the target of 11,000 students enrolled in 2025, corresponding to the annual undergraduate enrollment plan of about 2,700 students. Because of its teaching quality and reputation, the Nanjing University of Communication ranked among the top private arts colleges. At the same time, benefiting from strong demand from students for art majors, the Nanjing Institute of Communication and Communication only admits more than 3,000 students from about 70,000 students applying for the exam every year. The admissions ratio reaches 23:1, far exceeding the average ratio of 1. 3:1 in private colleges. Therefore, we believe that after the Olympic College is merged into the Nanjing School of Communication, the acquisition of admissions indicators will be more certain. Furthermore, since the Olympic Academy needs to contribute 15% of its revenue to the Nanjing Institute of Physical Education as a management fee every year, after the merger and acquisition is completed, the management fee will also be abolished, and profits are expected to return to the school and Chinese audiovisual education. On the other hand, there are 5 art majors and 3 sports majors among the 8 majors under the Olympic Academy. We expect to empower the Nanjing Institute of Communication in the sports sector and are expected to develop comprehensive “sports+art” majors. At the same time, the management ability and running experience of Huaxia audiovisual education institutions will also be used at the Olympic College to improve its operational efficiency.

The rapid expansion of admissions plans has led to the development of higher education business. The enrollment plan of the company's Nanjing School of Communication for the 21/22 academic year reached 6,790 students (undergraduate enrollment plan: 4,900, special upgrade and five-year consistent college upgrade plan: 1,890 students), with a year-on-year growth rate of 44%. Since the company's application ratio is far higher than the industry average, we believe the registration rate of Nanjing University of Communication will remain at 99%. As a result, we expect the number of students enrolled at Nanjing University of Communication to reach about 21,822 in the 21/22 academic year, an increase of about 24% over the previous year. Since the application for fees from Nanjing University of Communication has yet to be answered and this year's enrollment is about to begin, we expect the university's tuition fees for the 21/22 academic year to remain at an average level of 16,000 yuan. However, we believe that the strong demand for studies at the Nanjing University of Communication will also lay the foundation for tuition price increases. As Jiangsu Province liberalizes tuition pricing, we expect the undergraduate fees at the Nanjing School of Communication to increase to about 18,000 yuan in the 23/24 academic year, with a compound growth rate of about 2.3% over 3 years. As a result, we predict that the revenue of the company's Nanjing School of Communication (excluding the Olympic School) will reach 8.3 billion yuan in 2023, corresponding to a three-year compound growth rate of 32%.

Keep buying. Although tuition fee growth at Nanjing University of Communication has slowed, thanks to the merger of the Olympic Academy and the huge development potential of the company's higher education business and art training business, we expect the revenue of audiovisual education in China to increase from 790 million yuan in 2020 to 2,040 million yuan in 2023 (compound annual growth rate of 37%). With the company's rapid expansion and potential tax rate changes, we expect the Group's adjusted net profit to reach $726 million in 2023. As a result, we raised our earnings per share forecast for '21 from $0.22 to $0.23, our earnings per share forecast for '22 from $0.34 to $0.35, and our earnings per share forecast for 2023 from $0.4 to $0.42. We raised our target price slightly to HK$9.58 to meet the 69% upside and maintain our buying rating.