Events:

On September 25, 2019, Kaiyuan held the 35th meeting of the third session of the board of directors to resolve and announce the following matters:

1. Mr. Jiang Yong, founder, chairman and president of Heng Enterprise Education, serves as the chairman of the listed company.

2. Mr. Zhao Jun, founder and chairman of CUHK, serves as the general manager of the listed company.

3. Mr. Luo Xudong, former chairman of the listed company, resigned as director and chairman of the listed company.

4. Mr. Ding Fulin, Chief Financial Officer of Heng Enterprise Education, serves as the Chief Financial Officer of a listed company.

5. Cooperate with famous universities to set up a joint venture company to make use of idle old industrial parks to prepare for the establishment of ordinary senior high schools.

6. It is proposed to set up an industrial investment fund of 1 billion yuan to lay out the education industry chain.

7. Set up Guangzhou Kai Curriculum Education Technology Co., Ltd., a holding company, as a platform for Heng Enterprise Education to set foot in the operation of intelligent education in colleges and universities, formally operate university projects and build a new "university business" track.

Comments:

1. Jiang Yong served as chairman of Heng Enterprise, Zhao Jun served as general manager of CUHK and increased holdings at a premium is a milestone in the improvement of corporate governance structure.

Kaiyuan joint-stock company governance structure has been comprehensively optimized, Heng enterprise Jiang Yong served as chairman of the listed company, education business executives are fully responsible for the operation of the listed company. After Mr. Luo Xudong, former chairman of the listed company, resigned as chairman of the listed company, Mr. Jiang Yong, founder and chairman of Heng Enterprise Education, served as chairman of the listed company, Mr. Zhao Jun, founder and chairman of CUHK, served as general manager of the listed company and Mr. Ding Fulin, Chief Financial Officer of Heng Enterprise Education, served as Chief Financial Officer of the listed company.

Mr. Zhao Jun increased his holdings at a premium in the early stage, and the price and amount of the holdings exceeded expectations, demonstrating the confidence of senior executives in the education business. (1) the increase price exceeded expectations: the initial secondary market share price was about 9.0 yuan, and the increase price was 12.0 yuan at a premium of 33%; (2) the amount of increase exceeded expectations: Mr. Zhao Jun spent about 220 million yuan to increase his holdings of Kaiyuan shares, which was originally planned to be about 115 million yuan. Kaiyuan shares announced on June 3, 2019: Kaiyuan shares acquired a 30% stake in Zhongda Yingcai for 144 million yuan in cash. Zhao Jun, the talented founder of CUHK, promised to increase his holdings of Kaiyuan shares by means of market auction, block trading or agreement transfer within six months after the transfer of the underlying assets, with a total increase of not less than 115.2 million yuan. The amount of this increase of about 220 million yuan exceeds the previous commitment of about 115.2 million yuan.

The shareholding ratio of senior executives in education business has been highly close to that of the Roche family, the founder of listed companies, and substantial steps have been made in the improvement of corporate governance structure. On May 10, 2019, the Roche family, the founder of Kaiyuan shares, held about 29.24% of the shares, while the education business founding team, as the core contributor to the performance of listed companies, held about 18.25%. In this increase, Zhao Jun's shareholding increased from 1.87% to 7.19%, an increase of nearly 5.32pcts. After the completion of Zhao Jun's increase, the Roche family has a total shareholding of about 24.24%; education business executives have a combined shareholding ratio of about 23.57%, with a difference of less than 1.0% between the two sides. With the education business executives gradually bound to the interests of listed companies, we believe that Kaiyuan (Hengli + CUHK) is expected to return to the rapid growth trend. 2019H1 vocational education and training business is 752 million yuan, an increase of 48% over the same period last year. The better-than-expected performance is an important sign of a clear corporate governance structure.

2. 200 billion market opens huge space, vocational education and training and for-profit high school double track layout, "Xinkaiyuan" is expected to step into the rapid development channel.

2.1. Vocational education business: financial leader multi-track layout

Vocational training business ranks among the top five in China, and 100% of the operating performance of listed companies in the future will come from education business. Before Q1 in 2019, Kaiyuan shares were the double main business of "manufacturing and education". In March 2017, Kaiyuan shares were arranged in the field of vocational training through mergers and acquisitions, respectively, with 1.2 billion yuan (480 million yuan in cash + 720 million yuan in share payment). And 180 million yuan (90 million yuan in cash + 90 million yuan in share payment) to acquire 70% equity of Zhongda Yingcai, with a fixed price increase of 14.62 yuan per share. In 2018, the net profit loss of manufacturing business was 41.59 million yuan, and that of vocational education business was 140 million yuan. The manufacturing business of Kaiyuan shares has been spun off by 2019Q2, and the future listed companies will focus on the main business of education.

The 2000 billion Hongda market opens up a broad space for long-term growth for Xinkaiyuan. (1) Finance and Economics: we estimate that there is about 100 billion space for training in the financial racing track, including 15 billion yuan for certificate training in finance and economics and more than 80 billion yuan for practical training in financial skills. Heng Enterprise Education is the first leader of China's financial and economic track. (2) self-examination: we estimate that the current market scale of self-examination training (online and offline) is about 60 billion yuan. (3) IT design: we estimate that the market size is about 30 billion yuan.

Heng Enterprise Education: the main business is financial accounting training, which will be laid out in depth in the fields of finance and economics and design in the future.

Heng Enterprise is an accounting training giant covering the whole country, with products covering financial accounting skills training, financial accounting research training, academic education intermediary services, as well as subsidiary traction IT training and Tianfu education design training and so on. As of 2019H1, Heng enterprises have 397 terminal campus outlets in 24 provinces and cities across the country, an increase of 49 over the same period last year, including 338 Heng enterprises, 51 Tianli and 8 traction. In 2018, Heng Enterprises enrolled 170800 students (+ 24%), the order rebate was 1.263 billion yuan (+ 38%), and the guest price was 7394 yuan per person (+ 12%). The income of Heng Enterprise Education in 16-18 is 3.82 million yuan, the net profit is 0.92 billion yuan, and the net profit is 1.1 billion yuan.

CUHK talents: online vocational education and training quality platform. The main business of CUHK talents is Internet online vocational examination education, with courses covering 10 areas such as construction engineering, finance and finance, and professional qualifications, including 134kinds of subdivided courses and 8450 online school courses. In 2018, Mid-British talents added 2.73 million registered members (+ 76%), 398900 online transactions (+ 26%), order rebate of 99.63 million yuan (+ 60%), and customer unit price of 250 yuan per person (+ 27%). The income of outstanding talents of CUHK in 16-18 was 0.43 RMB 0.64 / 94 million yuan respectively, and the net profit was 0.16 pound RMB 0.23 billion yuan respectively.

1. The financial and economic business will maintain a compound growth of 30% in the next three years. As the number one leading institution in China's financial and economic training, Heng Enterprises returned about 810 million yuan in order sales in 2018, and the proportion of skills and certificate training was about 7:3. In 2018, the total number of applicants for the national accounting title examination was 5.446 million, including 4.036 million for junior level, 1.354 million for intermediate level and 56000 for senior level. In 2019, the number of CPA applicants exceeded 1.73 million. The total number of accountant titles and CPA applicants is about 7.2 million, while the number of financial training people of Hengli in 2018 is only about 170000, accounting for 2.4 per cent. A large base population constitutes a huge flow entry pool, and Heng Enterprises will devote themselves to building and upgrading the certificate teaching and research course system in 2019. In the future, it will guide the high-guest unit price practical skills courses (7-8000 yuan per person) through low-guest unit-price textual research courses (several hundred yuan per person). At present, Heng Enterprise Finance has about 350 campuses, and the average number of new campuses in the future will be no less than 50. At present, the coverage of prefecture-level cities in China is about 50%. In the future, it is planned to achieve full coverage of prefecture-level cities in China.

2. The self-examination business is expected to maintain a compound growth of more than 50% in the next 3 years. The person in charge of the self-examination business of Heng Enterprise is the former co-founder of Xing Shuai Education, a well-known vocational education online company. Self-examination business online and offline enrollment, pure online teaching, courses include: self-examination, adult college entrance examination (correspondence), distance, national development university (RTVU), etc., the current per capita tuition fee is about 7000 yuan per person, the service period is about 3 years. The self-examination business started from scratch at the end of 2016, with order sales of about 225 million yuan in 2018, and is expected to maintain a compound growth rate of more than 50% in the future. On the one hand, the rapid development of the self-examination business benefits from the senior management team's proficiency in Internet marketing. At present, the sales team has about 700 people, and the control of the digital operation system is the core of business development; on the other hand, it comes from about 350 channel stores all over the country, and the combination of line and network will help to reduce the cost of getting customers.

3. The design business (Tianyu Education) is expected to maintain 50% + compound growth in the next 3 years. Heng Enterprise Education acquired a 56 per cent stake in Tianyu Education at a consideration of 118 million yuan in 2017 and pledged performance of 1200 yuan, 1800 yuan and 28 million yuan in 2017-2019. Courses include two-dimensional and three-dimensional categories, including two-dimensional courses including graphic design, web pages, e-commerce, UI, dynamic vision, business illustration, Internet marketing, etc.; three-dimensional courses include interior design, decoration design and so on. At present, there are about 56 campuses, with a long-term target of 150 in the future. The order sales of Tianyu Education in 2018 is about 196 million yuan, and the compound growth rate is expected to exceed 50% in the future. In addition, if the merger of the remaining shares is taken into account in the future, it is expected to further thicken the performance of listed companies.

2.2, high school business: in cooperation with famous schools, it is expected to fully activate the idle industrial park to set up a joint venture company to make use of the idle old industrial park to prepare for the establishment of ordinary high school. Since 2016, the country has issued a series of important policies to support and standardize the development of private education, and the establishment of ordinary high school has the legal basis and policy conditions. Kaiyuan shares plan to set up a joint venture with Pan Guoping and a designated third party to set up ordinary high school, make effective use of idle land and buildings in the old industrial park, activate idle assets quickly and effectively, and lay out the field of high-quality ordinary high school.

(1) organizers and shareholders: Kaiyuan shares account for 60%, Changsha Chucai Learning School legal person Pan Guoping and designated third parties account for 40%.

(2) registered capital: 50 million yuan, Kaiyuan shares contributed 30 million yuan, Pan Guoping and designated third parties contributed 20 million.

(3) in terms of venue leasing, the new school leases all the venues and buildings in the old industrial park from Kaiyuan shares (setting aside 3 floors for Kaiyuan shares) for a lease period of 15 years; the rent is 4 million yuan / year, increasing by 5% every 3 years.

(4) Ms. Pan Guoping: she is now the legal representative of Chucai further Education School. Chucai further Education School was established in 1986, which was first subordinated to the Hunan Provincial Department of Education, which is one of the first two private schools in Hunan. In 2000, it was assigned to the Changsha Municipal Bureau of Education. Since 2012, Changsha Municipal Bureau of Education has assigned Chucai education to the management of various district education bureaus. Since its establishment, Chucai education has taken the college entrance examination, self-examination, adult education and accounting as its main business.

Through the establishment of a joint venture company to prepare for the establishment of ordinary high school is conducive to the rational use of existing idle assets and create new economic growth points. After the divestiture of the company's manufacturing assets, the old industrial park is basically idle, Kaiyuan old industrial park office area, production area, a total of 27287.11 square meters (40.9mu) of industrial land, construction area of about 48000 square meters, total fixed assets of 73.49 million yuan, a year of depreciation and amortization expenses of about 4 million yuan, taking into account the industrial park operation and maintenance costs and costs, basically close to 6-8 million / year cost. Through the establishment of private ordinary high schools, it is conducive to the rational use of the current idle assets.

The ordinary high school plans to entrust the school under the Yali Middle School to the trusteeship. Kaiyuan shares set up a joint venture company to set up a new private ordinary high school, which needs to be listed in cooperation with a famous school and entrusted to a trusteeship. At present, it is tentatively scheduled to cooperate with Changsha Nanya Middle School under Yali Middle School. Changsha Nanya Middle School, the first name of Changsha Yali (boarding) Middle School, is a state-owned full-time full-time complete middle school founded by Changsha Yali Middle School, which was acquired by Changsha Yali Middle School and the Hunan Branch affiliated to Peking University in 2002. In 2003, the school changed its name to Changsha Yali boarding Middle School, in 2009 it was officially named Changsha Nanya Middle School, and in 2012, it was transformed into a state-owned public school.

3. Investment suggestions

Downplay the short-term operating results in 2019. Kaiyuan 2019H1 realized income of 811 million yuan (+ 35.64%), net profit of 37.62 million yuan (- 42.44%), and performance guidance of 470 million yuan (- 53.88%) for the first three quarters of 2019. The decline in performance in 2019 is mainly due to the impact of divestiture expenses and the expansion of vocational education business: (1) we estimate that the related costs of divestiture include accounts receivable collection fees, manufacturing losses, industrial park depreciation, and public expenses totaling at least 50 million yuan; (2) Education business sales and teaching and research team building, online education layout and so on also make a negative contribution to 2019 business performance.

Focus on the growth trend after 2020: income 40% + compound growth, profits return to the industry average. (1) income side: 2019H1, education income of Heng Enterprise is 701 million yuan (+ 46.05%), and talent income of CUHK is 51.08 million yuan (+ 44.30%). Looking forward to the future, the income of financial business, self-examination business, design business and online education business (CUHK talent) is expected to maintain 30%, 50%, 50% and 50% compound growth. (2) profit side: after 2020, the net interest rate is expected to return to the normal level of the industry. Kaiyuan shares, vocational education industry net interest rate in 2017 and 2018 is about 22% and 12% in 2019 is expected to be about 6%. We expect to return to the net interest rate of more than 10% after 2020.

Investment suggestion: the reconstruction of valuation system brought about by the improvement of corporate governance structure. We maintain the forecast of the net profit of Kaiyuan shares in 1921 at 0.80,2.48 and 354 million yuan. 2019 is a year when Kaiyuan's corporate governance structure is improved and its business is readjusted. It is likely that the company's profits will return to the normal level in 2020. According to the valuation level of the first public education in the standard industry (19/20PE about 55x/40x) and the second China Oriental Education in the industry (19/20PE about 33x/26x), apart from maintaining rapid business growth, the interests of the actual controllers and management of the company are deeply consistent with those of listed companies, and entrepreneurship is also one of the important reasons. Vocational education and training industry policy dividend and huge space, Kaiyuan shares (Heng Enterprise Education + CUHK talents) as the fifth enterprise in the industry, with the gradual improvement of the corporate governance structure in the future, the interests of education business executives tend to be consistent with those of listed companies. Future growth is expected. Considering that the current market capitalization of Kaiyuan shares is only about 4.5 billion yuan (20PE about 18x), the valuation is significantly lower than the industry average 26x valuation, maintaining the "buy" rating.

Risk factors. Operation and management risks, the new campus is not as expected, and so on.