Recommended logic: The industry is recovering. The company focuses on South China, restarts the expansion and transforms quality education and high school training after the double reduction policy. Against the backdrop of a sharp withdrawal from the industry, it restarted expansion and superimposed community area expansion in 23. It is expected to become one of the leaders in education and training in South China in the future. The company's estimated revenue for 24-26 is $8.09/11.08/$1,463 million, and the net profit for 24-26 is estimated to be RMB1.44/2.04/284 million, corresponding to 24-26 EPS of $0.26/0.37/0.51, and a closing price of HK$4.80 on May 24, 2024, corresponding to 17/12/9XPE in 24-26. Combining relative valuation and absolute valuation, the 25-year target price was HK$9.95-9.97, covered for the first time, giving it a “buy” rating.
Company Overview: The transformation of quality education after the double reduction led to a rapid recovery in performance compared to before and after the double reduction. We analyzed the company's changes: 1) revenue has not yet recovered to 21, mainly due to the fact that the number of trainers has not fully recovered, but the price is basically close; 2) benefiting from increased capacity utilization, gross margin is close to the 21-year level, and the mother/adjusted net interest rate has exceeded the level before the double reduction, mainly benefiting from a sharp drop in rent costs in the past two years. 3) Operating indicators: Judging from the number of teachers, it is currently about 60% of what it was before the double reduction, but during the adjustment period, the company's core management and teacher team stabilized, and the number of teachers gradually increased as the business resumed.
Industry analysis: Supply is clear and demand is strong. It is expected that the Guangzhou+Shenzhen K12 100 billion market size policy is conducive to market clearance. Demand is strong, and leading education and training are expected to enjoy market dividends. After the reduction, only the Shenzhen region will remain. We believe that it is expected to return to the Guangzhou region as business develops. According to our estimates, the Shenzhen/Guangzhou K12 education and training market is expected to reach 453/41.1 billion yuan in 2024. In the long run, it is expected to reach 753/56.3 billion yuan in 2028, corresponding to 13.6%/8.7% CAGR in 23-28, which is expected to exceed 130 billion yuan in total. According to our estimates, Leh currently accounts for about 1% of Shenzhen's education and training market share, and there is still great potential for growth.
Competitive advantage: Teachers and management are fully motivated, using services to retain customers 1) Focus on service links, improve customer retention by providing free after-school hosting, reduce customer acquisition costs, and continue to increase class renewal rates 2) The company has established a complete teacher training mechanism and commission and promotion mechanisms such as excessive progressive systems 3) The company implements a partnership mechanism, and can achieve rapid campus expansion through incentives from teachers and principals.
Growth driver: store opening+lift area, net interest rate still has room for improvement 1) We expect the company to expand the number of stores at a rate of 20%-30% per year, and the company is expected to gradually restart and expand the Guangzhou market based in Shenzhen. We are expected to gradually rearrange the Guangdong region in the future. We begin to expect the number of learning centers to reach more than 200 in 2026; 2) After the double reduction, the company is expected to gradually expand the store to 1,200 square meters. According to our single-store model, we can basically achieve break-even in the first year, benefiting from a drop before and after a double reduction in housing rents demand More than supply, the full class rate, class renewal rate, and tuition fees have all increased. According to our estimates, the 1,200-square-meter store is expected to achieve a 40% net interest rate; 3) Increased gross margin and lower management fee ratios are expected to drive a further increase in net interest rates.
Risk warning
Market competition risk; risk of network expansion falling short of expectations; risk of tuition fee increases and student enrollment falling short of expectations; risk of loss of management team and teaching staff; systemic risk