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China New Higher (2001 HK) - De-rating likely ended, waiting for overhang to clear

作者: Tommy WONG,Crystal LI
时间: 2019年06月19日
重要性: 一般报告
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摘要: Report title:China New Higher (2001 HK) - De-rating likely ended, waiting for overhang to clear
Analyst:Tommy WONG,Crystal LI
Report type:Company
Date:20190619
[Summary]

■ 2019 driven by organic growth as balance sheet recovers
■ Xinjiang school fund recovery continues to be an overhang
■ Maintain NEUTRAL, revised P&L, TP trimmed to HKD3.4
Xinjiang School overhang; enrollment has policy support
Share price has taken a hit since FY18 results due to misexecution of its Xinjiang School acquisition. The litigation is in progress and remains on track with management’s previous guidance of 1~2 years duration required for recovery. We believe that much of this issue has been factored in, but the accounting treatment as well as risk of recovery remains an overhang. Policy side, despite muted situation for the announcement of Promotion for Private Education (民促法送审稿), New Higher indicated the favourable Vocational Education policies are working through to increases in 19/20 enrollment.
Organic growth for now, acquisitions likely next year
We forecast the New Higher to deliver 77% sales growth and 41% core earnings growth for FY19E. Key organic growth drivers are from its Yunnan school, Wuhan school and Henan school. Net debt/equity is among the highest among peers at 38.3% at FY18, and 13.2% in FY19E, vs. coverage peer avg. of -36% and -21%. As such we expect the company to take a breather in FY19 and recoup its balance sheet with tuition revenue in 2H19, and resume to paced acquisition in 2020 at the earliest.
Slight earnings upward revision, target price trimmed
We revised our model to reflect higher enrollment and tuition rate levels, and hence tuition revenue, which raise our GPM slightly (FY19 51%, vs. 49% previously). Our core earnings forecast are 12.3%/2.9% higher for FY19E/FY20E. Despite the upward revision, we lowered our target price to HKD3.4, from lowered multiple from 14x to 11x next 12-month multiple (in-line with peers FY19 average - excluding China Education Group) to reflect (1) weaker acquisition expectation, (2) sector average P/E de-rating to 11x FY19E P/E, and (3) FX. Our new TP implies 12x FY19E P/E and 11x FY20E.
Given the still Xinjiang School acquisition fund recovery pending at near RMB90mn, there is a potential that auditors would require some further write-down (30mn was already written down for FY18). In our view, further write-down could be a negative catalyst, and a full RMB90mn write-down would lower our FY19E earnings forecast by 23%. Our rating is unchanged at NEUTRAL.

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