Maple Leaf (1317 HK)

Transcription

1 Equity Research Consumer Discretionary Maple Leaf (1317 HK) Buy (maintained) Target price: HK$8.00 Student number below expectation, but company still benefitting from China s rising middle class Albert Yip, CFA SFC CE No. ADT599 albertyip@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance 320% 280% 240% 200% 160% 120% 80% 40% 0% -40% Oct-15 Jan-16 Apr-16 Jul-16 Source: Bloomberg Key data Source: Bloomberg HSI Maple Leaf Oct 6 close (HK$) 6.94 Shares in issue (m) Major shareholder Sherman Jen (54.5%) Market cap (HK$ bn) 9.4 3M avg. vol. (m) W high/low (HK$) 8.64/2.12 Maintain Buy We recently met with Maple Leaf s management and visited their schools in Dalian and Tianjin. Although its ~20,500 total student enrollment number as of Sept 15, 2016, was below expectation, the proportion of high-margin high school students was above our expectation. Also, we believe the company can accelerate its growth through acquisitions, helped by its strong net cash position (Rmb1bn as of end-fy15). We still like Maple Leaf s cross-region expansion capability, strong academic record and its leading status in China s international school market, which should benefit from the increasing demand for quality education among China s rising middle class and the two-child policy over the long-term. We revise our FY16/17/18 adjusted net profit forecasts by +4%/+2%/- 7% to factor in lower student enrollment numbers and a higher proportion of higher-margin high school students. We raise our TP from HK$7.50 to HK$8.00, representing 24.2x FY18E P/E and based on 1.1x PEG at 22% EPS CAGR during FY18-19, after rolling forward our valuation basis. We cross-check this with a DCF-based valuation, which comes in at HK$8.80/share, suggesting our PEG-based TP is not aggressive. Catalysts: Upcoming IPOs of private schools operators in 4Q16, M&A (possibly in Beijing/Guangdong), the Shenzhen-HK connect trading debut, and amendments to The Law for Promoting Private Education. Latest student numbers The company s total student number increased from 19,353 as of March 31, 2016, to around 20,500 as of Sept 15, 2016, which we think is below market expectation. Student enrollment at three new schools (in Xi an, Huai an and Pinghu) has been slightly below management s expectation. Regarding the mix of students, around 7,500/4,000/7,500 students were in the company s high schools/middle schools/elementary schools, respectively. The number in its high schools (37% of total student enrollment) was higher than we had expected. Ambitious expansion plan The company plans to have established ten large school clusters in China by 2025, with each cluster having 8,000-12,000 students. Over the long term, the company targets to have 40,000/100,000 students by June 2020/2025, implying a CAGR of ~20% during FY The company also plans to enter Shenzhen and Beijing in 2018 via M&A or a light asset model. Overseas, the company intends to open one school in North America and Southeast Asia each year. Two schools in Canada are interested in co-operating with Maple Leaf. In Southeast Asia, the company is studying the feasibility of switching to non-canadian BC curriculums such as the IB or A-levels. We believe good execution will be required for expansion into new markets and the adoption of new curriculums. Tuition fee increases in school year backed by strong utilization rate Shanghai high school and Tianjin Taida and Huayuan schools (from elementary to high schools) raised their tuition fees by 23% and 26-30% respectively, largely in line with our expectation. The current utilization rate at the Tianjin Taida school is around 100%. Unexpectedly, the company also raised tuition fees for its middle and elementary schools in Wuhan by 31-32%, backed by a utilization rate of around 90%. Downside risks Student enrollment falls below expectation; surge in BC teacher costs; Canadian dollar appreciates against the Rmb; poor execution of overseas expansion. Stock valuation Year-end Turnover Net profit Adjusted net Adjusted EPS YoY Adjusted Yield (%) BPS P/B ROE Aug 31 (Rmb m) (Rmb m) profit (Rmb m) EPS (%) P/E (Rmb) (%) na E E 1, E 1, E 1, Sources: Company data, GF Securities (Hong Kong)

2 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Company report Figure 1: Existing schools and projects in the pipeline City Foreign Year of Asset High Middle Primary Preschool international Lease term opening light school school school school Dalian 1995 N Wuhan, Hubei 2007 N Tianjin (Taida) 2008 N Chongqing 2009 N Zhenjiang, Jiangsu 2011 N Luoyang, Henan 2012 Y % profit sharing Ordos, Inner Mongolia 2012 Y Rent-free Shanghai 2013 N 1 1 Pingdingshan, Henan 2014 Y % profit sharing Tianjin (Huayuan) 2014 Y yr rent-free, Rmb1,000/student afterwards, <8% of rev at most Jingzhou, Hubei 2015 N 1 1 Yiwu, Zhejiang 2015 N Asset-light high school Yiwu, Zhejiang 2016 Y 1 Pinghu, Zhejiang 2016 N % profit sharing Xi'an, Shaanxi 2016 Y % profit sharing Huai'an, Jiangsu 2016 Y 1 1 Rental Tianjin (Kaifaqu) 2016 Y 1 Profit sharing Kamloops, Canada 2016 Y 1 Fixed rental of CAD156,000/yr for first two years (5 yr contract) Cities in Hubei 2016/17 Y 1-2 Profit sharing Xi'an, Shaanxi 2017/18 Y % profit sharing Huzhou, Zhejiang 2017/18 Y Profit sharing Weifang, Shandong 2017/18 Y MOU Yancheng, Jiangsu 2017/18 Y 1 1 Profit sharing Chongqing (Liangping) 2017/18 Y Rental Yancheng, Jiangsu 2018/19 Y 1 1 Profit sharing Dalian 2018/19 Y MOU Shijiazhuang, Hebei 2018/19 Y MOU Chongqing (XT Data Valley) 2018/19 Y MOU Total Sources: Company data, GF Securities (Hong Kong) Figure 2: Student enrollment capacity and utilization rate 70,000 60,000 50,000 40,000 30,000 20,000 10, % 73.5% 64.0% 62.0% 59.5% 61.6% 60.1% 65.0% 61.6% 55,390 43,990 35,640 30,040 26,090 22,490 18,990 14,290 12,490 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E Number of students (LHS) Utilization rate (%) (RHS) 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 3: P/E band (HK$) x 25x 20x 15x 9x 1 2

3 Figure 5: Valuation comparison for education service providers Mkt Cap P/E (x) Net profit growth (%) EPS growth (%) PEG (x) Revenue growth (%) Yield (%) P/B (x) ROE (%) Ticker Rating (US$ m) Currency Price TP FY16E FY17E FY18E FY16E FY17E FY18E FY16EFY17E FY18E FY17E FY16EFY17EFY18EFY17E FY18EFY17EFY18EFY17EFY18E Maple Leaf 1317 HK NR 1,217 HKD Sources: Bloomberg estimates, GF Securities (Hong Kong) estimates Figure 4: Key assumptions Year-end Aug 31 (Rmb m) FY15 FY16E FY17E FY18E FY19E Total revenue ,031 1,242 1,530 growth % 20.9% 28.6% 22.8% 20.4% 23.2% Tuition fees ,055 1,307 growth % 18.8% 28.1% 22.5% 21.3% 23.9% Others growth % 33.8% 31.1% 24.9% 15.9% 19.3% CAD per Rmb exchange rate change % 11.2% 4.7% -8.9% 1.7% -3.2% Gross margin 45.7% 50.5% 50.4% 50.3% 50.8% Marketing expenses ratio 3.4% 2.9% 2.7% 2.5% 2.2% Administrative expenses ratio 15.6% 15.6% 15.4% 14.9% 14.0% Operating profit margin 27.8% 33.1% 33.6% 34.1% 35.5% Adj effective tax rate -5.2% -7.5% -9.5% -12.0% -15.0% Net profit growth % 413.4% 34.2% 18.9% 19.8% 24.3% Adj net profit growth % 45.8% 45.3% 22.3% 19.7% 24.2% Net profit margin 28.5% 32.1% 32.0% 31.8% 32.1% Payout ratio 43.4% 40.0% 40.0% 40.0% 40.0% Average tuition fee (Rmb) 37,483 39,920 41,117 42,145 43,410 growth % 1.2% 6.5% 3.0% 2.5% 3.0% Student enrollment (end of June) 16,078 19,526 22,810 27,274 32,957 growth % 19.0% 21.4% 16.8% 19.6% 20.8%, Bloomberg estimates China/International educational services providers Virscend 1565 HK NR 1,653 HKD 4.15 na na na New Oriental Education EDU US NR 7,250 USD na Tarena International TEDU US NR 854 USD na China Distance Education DL US NR 458 USD na na na TAL Education XRS US NR 5,700 USD na Hailiang Education HLG US NR 208 USD 8.58 na (72) (73) (73) 10 na na na na na na Nord Angila NORD US NR 2,270 USD na G8 Education GEM AU NR 882 AUD 3.06 na Simple average Simple average excluding HLG.US Figure 6: DCF analysis Year-end Aug (Rmb m) FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E Revenue 1,031 1,242 1,530 1,820 2,088 2,306 2,450 2,499 growth 22.8% 20.4% 23.2% 18.9% 14.7% 10.5% 6.2% 2.0% EBIT Tax paid (28) (44) (70) (83) (95) (105) (112) (114) NOPAT Capex (585) (250) (250) (258) (265) (273) (281) (290) Depreciation Change in working capital Free Cash Flow ,024 1,152 1,232 1,254 Discounted FCF ,511 Terminal value: 2% growth rate 5,511 Risk-free rate 2.63% Sum of discounted FCF 9,359 Beta 1.14 Net cash/(debt) in FY17E 1,235 Expected market return 14.07% Value of company 10,594 WACC 13.88% No of shares (m) 1,361 Value per share (HK$) 8.8, Bloomberg 3

4 Figure 7: Financial statements Income Statement Balance Sheet Year-end Aug 31 (Rmb m) FY15 FY16E FY17E FY18E FY19E Year-end Aug 31 (Rmb m) FY15 FY16E FY17E FY18E FY19E Revenue ,031 1,242 1,530 Fixed assets Cost of sales (354) (416) (512) (617) (754) PPE 1,398 1,613 1,794 1,960 2,108 Gross profit Prepaid lease payments Investment properties Other income Goodwill Marketing expenses (22) (25) (28) (31) (34) Intangible assets Administration expenses (102) (131) (159) (185) (214) Available-for-sale investments Other expenses (1) (2) (2) (2) (2) Books for lease Operating profit Deposits for construction of property and land use right ,660 1,812 2,330 2,491 2,635 Net finance income Listing expenses (7) Current assets Other non-recurring items Inventories Profit before tax Available-for-sale investments Income tax expense (11) (22) (34) (54) (86) Deposit, prepayment and other receivables Net profit Restricted bank deposits Adjusted net profit Bank balance and cash 1,022 1,241 1,576 2,011 2,569 Adjusted EPS (Rmb) ,156 1,371 1,713 2,155 2,724 Growth rates (%) Total assets 2,816 3,183 4,043 4,646 5,358 Revenue Adjusted net profit Current liabilities Adjusted EPS Deferred revenue ,014 1,268 1,534 Other payables and accrued expenses Margin & ratios (%) Amount due to related parties Gross margin Income tax payable OP margin Bank borrowings Adjusted net margin ,190 1,605 1,955 2,369 Effective tax rate Payout ratio Non-current liabilities Deferred tax liabilities Cash Flow Statement Interest-bearing bank borrowings Year-end Aug 31 (Rmb m) FY15 FY16E FY17E FY18E FY19E Others Profit before tax Depreciation and amortization Equity Net finance income (5) (20) (16) (23) (32) Shareholders' equity 1,812 1,972 2,194 2,447 2,746 Others (18) Change of working capital Total liabilities & equity 2,816 3,183 4,043 4,646 5,358 Tax paid (1) (17) (28) (44) (70) Operating cash flow Financial Ratios Year-end Aug 31 FY15 FY16E FY17E FY18E FY19E Capex (212) (270) (250) (250) (250) Change of AFS investments (3) Current ratio Acquisitions (36) (7) (335) 0 0 Quick ratio Others 12 1 (2) (2) (2) Investing cash flow (240) (210) (587) (252) (252) Asset turnover Total assets/total equity Change of borrowings (224) Net cash/(debt) (Rmb m) 1,022 1,241 1,235 1,669 2,227 Interest paid (4) 0 (10) (10) (10) Dividend paid (27) (107) (121) (144) (176) ROE (%) Share issue ROA (%) Others (63) Financing cash flow 434 (107) 211 (154) (186) Net change of cash flow Forex changes

5 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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