The number of students in the 2021/22 school year continues to rise, and performance growth has been locked in

It is hoped that the number of new students in the 2021/22 academic year will reach 95,000, an increase of 11% over the previous year. Among them, the number of college students increased 21% year on year, and the number of undergraduate students decreased by 4% year on year. The decline in undergraduate credits is mainly due to the hope that four of its schools are being transferred, and it is hoped that there will be a normalized increase in the number of new students after the 2022/23 school year. We expect the total number of students in the 2021/22 school year to reach 247,000 (25% year-on-year increase), with endogenous growth of 11%, and newly acquired schools contributing 14%. I would like to emphasize that with more investment in improving the quality of teaching, etc., there will be a good increase in tuition fees per student in the next few years (for example, the average tuition fee for Sichuan schools in the 2021/22 school year will increase by 15-20% year over year), and the increase in tuition fees will support the 15-20% year-on-year growth rate of endogenous students.

Multiple engines empower solid and bright profit prospects

We expect core earnings to grow at a compound growth rate of 52% in FY20 to 22, mainly driven by the following factors: 1) endogenous growth benefiting from favorable policies and the double increase in student numbers and tuition fees; 2) the two self-built schools will commence operation in September 2021, and the other two will commence operation in March 2022; 3) the four new schools acquired in the first half of FY21 (Jinken, Inner Mongolia, Komsomolsk and Sinawa) will be fully consolidated in FY22, which together will contribute 50% of FY22 incremental revenue; 4) the four schools acquired in the first half of FY22 will contribute 50% to the incremental revenue of the four schools in FY22; 4) The conversion will be completed by the end of this year . It is hoped that they will not pay a one-time break-up fee for the transfer, but will continue to pay fixed management expenses for the next 10 years and maintain teacher labor contracts with public universities. This is also in line with its strategy to improve the quality of teaching; 5) Further acquisitions will be implemented. Maintaining the buying rating: Recent oversales brought good buying opportunities, driven by policy expectations and strong performance. The valuation of the higher education industry peaked in April this year. However, the desired valuation has been declining since February of this year. Currently, the price-earnings ratio for the next 12 months is 10 times (2 standard deviations below the average), which is 55 percent off the 22 times peak (compared to the industry's 37% discount from the peak, and the industry's first tier companies have an average discount of 33%). We think hope has been oversold. The valuation cut was mainly due to the FY21 interim results falling short of expectations. We lowered our core earnings forecast for FY21 by 5%, mainly based on the fact that the consolidation was slower than expected, and kept the FY22 forecast largely unchanged. We lowered our target price from HK$4.2 to HK$3.4, based on 20 times the price-earnings ratio for the next 12 months (down 26 times from the previous 26 times due to lower industry valuations). Maintain the buy rating. Our target price corresponds to 31 times/20 times the forward-looking price-earnings ratio for fiscal year 21/22.