Beta stabilization: The investment theme after implementation of the policy was since Yuhua Education took the lead in listing in Hong Kong in 2017. The impact of laws and policies on the entire private higher education industry has been significant.

In the past two years, as higher education began to seek breakthroughs in quality, the formulation of regulations supporting regulations was constantly being explored, and uncertainty about core topics such as “classification management” has disturbed market sentiment several times. Until May 18, 2021, the “Regulations on the Implementation of the Private Education Promotion Law of the People's Republic of China” were officially announced three years after submission for review. Even if subsequent local rules would still have an impact on business details, this update has clearly indicated the development direction of private education in line with the spirit of the times, while initially eliminating a series of market concerns about business compliance and development space; the private college investment theme is expected to break away from phased risk aversion from suppressing stock prices and shift to screening high-quality α and seeking excess income.

Alpha highlights: asset quality consolidates the basic growth market

As the secondary market in the higher education industry enters its fifth year of development, the “endogenous+outreach” growth logic became a consensus, and the valuation of the industry's internal standards has initially been differentiated: asset quality is the basic market, and the reputation of a school determines the volume and price growth space for long-term credits and tuition fees; at the same time, the industry integration window has not yet been closed, and verified extension mergers and acquisitions capabilities are also necessary. In this sense, Yuhua's education assets are of high quality and have clear differentiated perspectives: 1) undergraduate credits are high, and license barriers are strong in horizontal comparison; 2) the location advantage is remarkable, occupying a strong market position in the most “economic” regions, which is conducive to maximizing the quantitative and price dividends of regional development in long-term development; 3) the high level of school governance and management is reflected in the impressive school rankings of Yuhua's schools, which essentially reflects the different “soft power” of management's strategic thinking.

Evaluation of listing growth path and future investment ideas

The growth of higher education groups is divided into two dimensions: “outreach” and “endogenesis.” We have reviewed Yuhua's transformation and growth path with the theme of “large number of high-quality school acquisitions” since its listing. We believe that mergers and acquisitions have dragged down the immediate profit margin on the company's statements, and that Yuhua's acquisition not only “buys performance,” but can also increase profits through integrated management capabilities:

The essence is to get an undergraduate license at a low price, then immediately carry out integrated management, reduce costs and control fees, and optimize reports in the short term; then gradually increase tuition and tuition fees through management improvements and hardware modifications. Looking ahead to future investment ideas: In the short term, the country emphasizes the “connotative development” of higher education, bringing opportunities for industry clearance and integration, and extension development through acquisitions as the main driving force for listed companies to surpass the growth rate of the industry. In the long term, we are optimistic about the continuous quota and tuition fee improvement potential of high-quality assets, and combined with the logic of improving corporate governance efficiency, the company is expected to bring stable performance and dividend income to investors.

First coverage, giving the target a “buy” rating

In the short term, the country emphasizes the “connotative development” of higher education, bringing opportunities for industry clearance and integration. The company is still in a dividend period of mergers and acquisitions, with potential for nonlinear growth. In the long term, public service targets characteristic of the single-school model are estimated to have high ROE and high dividend investment value after a steady state. We are particularly optimistic about Yuhua's competitive advantage with excellent asset quality, and will realize the potential for continuous increases in tuition and tuition fees in the long term. It is estimated that FY2021-2023 will achieve net profit of 13.20, 14.86, and 1,622 billion yuan respectively, corresponding to the current stock price PE of 9.89, 8.79, and 8.05 times, giving it a “buy” rating.

Risk warning:

1. the risk of changes in education policies;

2. The acquisition progress fell short of expectations.