The current situation of the company
On June 22, 2021, Huaxia Audiovisual Education announced that it would buy 100% of the rights and interests of the Olympic College of Nanjing Institute of physical Education at a consideration of 450 million yuan. The Olympic College, founded in 2011, is a secondary college organized by Nanjing Institute of physical Education and Jiangsu Huahong Science and Education Investment Group Co., Ltd., with the approval of Jiangsu Department of Education.
Comment
The consideration of the subject matter of the transaction is reasonable and the valuation multiple is in a reasonable range. The company will pay the transaction consideration of 450 million yuan in two installments, of which 250 million yuan will be used for the repayment of loans and 200 million yuan for equity purchase. The management said that the future capital expenditure of the school will not exceed 400 million yuan, including 75 million yuan for land and about 100 million yuan for the construction of dormitory buildings in each of the next three to four years. The management directs that the number of students will be raised to 11000 in 2025, and the number of students in school will reach a relatively stable state. according to our calculations, assuming that the increase in the number of students is in line with the company's guidelines, the tuition fees for freshmen in the 2023 and 2025 academic years will be raised to 20, 000 yuan and 25000 yuan respectively, and the income and adjusted net profit of the Olympic Academy will reach 200 million yuan and 81.58 million yuan respectively in 2025, discounting at a 10% discount rate to 2022. Then the acquisition consideration corresponds to the future capital expenditure of 13.9 times PE in 2022, which is in the reasonable range of the valuation multiple of the acquisition of undergraduate universities. There is a lot of room for revenue growth, and we expect its finance to improve and form a synergy with southward spread. 1) there is much room for improvement in tuition fees and places. According to the company's guidelines, the current average tuition fee for students of the Olympic College is 15000 yuan / academic year / person. In the future, it is planned to gradually increase the tuition fee together with Nanjing Media College. After the acquisition, it will be the second-level college of Nanjing Media College. At present, the number of students of the Olympic College is about 3000. On this basis, 8000 new places will be added by 2025. We believe that this will effectively and rapidly expand the number of places in Nanjing Media College. 2) the management and financial expenses can be saved after the acquisition, and the profit has much room for improvement. According to the announcement, the net profit margin of the Olympic Academy in 2020 is about 7.5%. According to management information, the Olympic Academy has a gross profit margin of about 54 games in 2020. However, the target needs to pay a management fee of 15% of the income to Nanjing Sports Institute and there are bank loans and third-party loans, which is a drag on financial performance, and a reduction in post-acquisition management fees and financial costs. We expect to be conducive to the repair of the underlying profits. 3) the concept of cultivating applied talents is consistent, and the major of sports and sports is expected to develop in coordination. The target is located in Jiangning District, Nanjing City, the geographical location is close to Nanjing Institute of Communication, the management is more convenient. At present, there are 8 majors, including 3 sports majors and 5 media art related majors. in the future, the company plans to promote the professional development of sports + news, exhibition and other specialties, which is expected to further strengthen the company's ability to train applied talents.
Valuation and suggestion
As mergers and acquisitions have not yet been delivered, we maintain revenue and adjusted net profit for fiscal years 2021 and 2022 unchanged, and maintain outperforming industry ratings and target prices of HK $9.0 (corresponding to 25 times earnings for fiscal year 2022), which is 59 per cent higher than the current share price. The company is currently trading at 16 times earnings in fiscal year 2022.
Risk.
Approaching the point of tuition fee increase, there may be a risk that tuition fee increase is less than expected.