Steady growth in performance and continuous improvement in profitability

2020H1 realized revenue of 932 million yuan (+ 11.6%). Gross margin 46.7% (+ 1.4%). The rate of sales administrative expenses decreased to 17.2% (- 1.5%). The net profit is 258 million yuan (+ 36.4%) and the net profit margin is 27.4% (+ 5.2%). The effective tax rate of the company is as high as 19.0%. Tax planning is under way. The reduction of the tax rate in the future will further increase the net interest rate.

Focus on the Great Bay area and expand K12 School

In the future, the company will continue to focus on the promising Greater Bay area and expand the scale of K12. On the one hand, the company's existing school land has a full capacity of 127000, which is twice as large as it is now. On the other hand, the company has nearly 1 billion cash and fund wealth management products, supporting the company to expand more schools in the form of self-built and light-asset operations. The school in Chaozhou started in April this year, and Jiangmen School is under construction; the two schools are expected to open in September 2021, adding 15000 students to the company's capacity.

The transformation from a single K12 education to a comprehensive educational institution

While doing a good job in K12 education, the company will change to a comprehensive educational institution, adding online education, management services and higher education. During the epidemic, the company has actively transferred offline business to online, accumulating good online school experience. The company has 20 years of experience in running a school in the field of K12, and will charge management fees by exporting management and services to private and public schools, which is conducive to the light asset operation of the company. In terms of higher education, the company will gradually explore through self-construction and mergers and acquisitions to strengthen the layout of running schools in the Dawan area at different stages.

Maintain the "buy" rating and slightly lower the reasonable valuation range

Considering that the company's income other than tuition and accommodation fees accounts for a large proportion, and the 2020H2 income side may be under pressure affected by the epidemic, we downgrade the company's revenue forecast for 2020-2022 to 20.11,24.13 and 2.775 billion yuan. Considering the rapid improvement of the company's profit margin, the net profit was raised to 4.49,5.77 and 676 million yuan. The company closed at HK $3.06 on May 18, and the corresponding forecast PE for 2020-2022 is 12.76,9.94,8.47 times, respectively.

Maintain the "buy" rating of the company, and lower the reasonable valuation range of the company to HK $4.18-5.05 due to changes in parameters.

Risk hint

The progress of M & An is not as expected; there are serious negative events in the company's operation; the policy is not as expected.