中国教育产业：教育水平越高未来就越光明.docx

蠡 UBSoGlobal Research23 January 2019Initiation of CoverageEquitiesEquitiesChinaConsumer ServicesEdwin Chen, CFAAnalyst +86-105-832 8186Felix LiuAnalyst +86-213-866 8850China Education SectorThe higher the education, the brighter the futureRobust industry growth with more opportunities for front-runnersWe initiate coverage of China's private university sector with a positive view. We expect a 26% increase in overall university enrolment in 2017-25E in China on rising enrolment rates at higher education institutions and high schools, despite a flattish population base. We expect private universities to capture more market share, given their occupation-oriented offerings and capacity constraints at public universities. We expect sector revenue to double to Rmb211bn in 2025E at a 9.3% 2017-25E CAGR. We view the impact of regulatory changes manageable for listed university operators, and their expansion strategy via M&As is intact. We initiate coverage of China Education Group (CEG) and New Higher Education (NHE) with Buys, Hope Education (Hope) with a Neutral, and Minsheng Education (Minsheng) with a Sell.New regulation likely manageable; value has emerged post sector de-ratingAnnounced on 10 August 2018, the draft implementation rules of the Private Education Promotion Law (the Draft) has led to a considerable negative shift in investor sentiment. However, we do not expect the Draft to fundamentally undermine the business models and growth strategies of listed private university companies. We have built an interactive model to help investors gauge the potential earnings impact. Our base cases imply 2-14% EPS downside and 161-364bp increases in net gearing for the four covered companies. As they have underperformed MSCI China by 26% since 10 August 2018, we think market concern about the new regulation could be overdone.CEG and NHE have more solid fundamentals.CEG stands out on our score card with top-tier growth prospects, balance sheet strength and capital returns. NHE ranks a close second. We believe CEG and NHE are less impacted by the Draft. Hope's unique focus on organic growth is margin-dilutive, but we think it is priced in. We think Minsheng has the most margin pressure due to its reliance on subsidy and rising financing costs from the M&A of Dianchi College.but are undervalued and thus are our top picksCEG/NHE/Hope/Minsheng are trading at 0.30x/0.29x/0.25x/0.62x 2019E PEG (FY20E for CEG). We see alpha in this mismatch with their ranking on fundamentals. We expect the finalisation of the Draft to remove a regulatory overhang and when investors refocus on fundamentals, CEG and NHE have the potential to re-rate and outperform.Figure 1: Valuations for higher education companies under our coverageNote: Above data as at the close of 22 January 2019. Source: Company data, Thomson Reuters, UBS-S estimatesCompany nameTickerUBS-SRatingPrice TargetPrice (LC)Mkt cap 30-d ADV_ (USDm) (USDm)FY1EPEPBFY1EEPSCAGR (FY0-FY3E)PEGNet gearing_FY1EFY1EEV/EBITDAFY2EFY3EFY2EFY3EChina Education Group0839.HKBuy14.0010.642,7394.919.3x14.1x12.0x2.7x46.8%0.30x-6%13.8x10.7x8.5xNew Higher Education2001.HKBuy5.003.766861.615.8x11.1x8.4x2.1x38.3%0.29x14%11.4x7.5x6.0xHope Education1765.HKNeutral0.940.837051.716.2x11.2x9.1x1.2x45.1%0.25x14%9.3x6.8x6.7xMinsheng Education1569.HKSell1.211.397120.416.1x12.5x11.2x1.3x20.0%0.62x12%13.2x9.2x7.8xThis report has been prepared by UBS Securities Co. Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 116. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.In MoE's 13th Five-year Plan, the government listed expanding higher education coverage in the first goal and explicitly mentioned a 50% gross enrolment rate as one of the key targets by 2020F.Government has high expectations for a wider coverage of higher educationFigure 6: Higher education gross enrolment rate comparisoncountriesincome countriescountries income countries countriesNote: 2016 data for regions outside mainland China. T = target. Source: MoE, China Association of Higher Education, UNESCOIn medium to long term, the China Association of Higher Education is projecting a 60% gross enrolment by 2030, putting China close to the level of more developed countries like the UK/Japan. We estimate this could mean 35m higher education enrolment for universities and junior colleges by 2025E, or 26% potential upside to the higher education enrolment in 2017 in China.A rising high school enrolment rate could help expand the applicant pool for higher educationWe estimate the enrolment ratio to high schools in China was only 47% in 2016, as a considerable portion of middle school graduates chose not to attend high schools and pursue highereducation (Figure 7). This level was noticeably below the global average.Research done by Henan University of Economics and Law in 2016 suggested that attending higher education (junior college and above) on average yields 32-151 % salary increases from high school (or equivalent) degree holders.Also, we think parents in China (and overall East Asian countries) tend to value higher education significantly, due to the cultural influence of Confucius thinking.We think the strong economic return from attending higher education and the Visible economic rewards are Chinese parents' culture preference for higher education have driven more middleattractive incentives for studentsschool graduates to attend high schools (which are more oriented towardsto attend higher educationpreparation for higher education than vocational schools).From 2004, to 2017, the percentage of middle school graduates that went to high school increased from 38% to 57% (Figure 11), and we expect this trend to continue in the medium to long term, providing support for the population base for university/junior college applicants.Adjusted NP: UBS-Se vs conesnsusRmbm600500400300Rmbm600500400300UBS-SeConsensus-11.7% vs consensus302251-10.1%vs consensus388-9.8% vsconsensus482432434.we expect downside risk to consensus200100020172018E2019E2020E2019E PE15x14x13x12x11x10x9x8x7x6x5x15x14x13x12x11x10x9x8x7x6x5x14.1x12.5xCEGNHEHopeMinshengMinsheng trades near the high end of major university operator valuations, despite weaker fundamentals; we expect downside risk to current valuationSources for exhibits above: Company data, Thomson Reuters, Wind, UBS-S estimatesUBS-S Researchreturn 个Minsheng Education GroupPIVOTAL QUESTIONSQ: Will the high contribution from subsidies to Minsheng's NP be its Achilles' heel?UBS-S VIEWYes. Subsidies contributed the most to Minsheng's NP among peers in 2017, due to its high student enrolment exposure to Chongqing, where the local government has been highly supportive of private education with generous subsidies.However, as Minsheng grows beyond Chongqing, we do not think its subsidies can grow proportionally, which could be a drag on its NP growth and margin. We project an 18% NP CAGR during 2018-20E, lagging the 36% revenue CAGR we forecast for the same period. NPM could fall from 53% in 2017 to 36% in 2020E.EVIDENCEAccording to MoE announcement in Sep 2015, Chongqing government started to give subsidies to private universities of Rmb2,000 per student and to private junior college of Rmb1,400-2,000 per student. Minsheng on-average had 37.8k students in Chongqing in 2017. We estimate Minsheng earned Rmb71-76m subsidies in Chongqing in 2017, which accounted for 69-74% of the total subsidies it received in 2017 and 28-30% of its adjusted NP. By end-2018, with consolidation of Dianchi College and Bohai Experimental School, we estimate the proportion of enrolment from Chongqing had fallen from 95% in 2017 to 61% in 2018E. But expansion in Yunnan and Shandong likely does not have comparable government subsidy support. With the Draft limiting government support for for-profit private universities (which Minsheng will likely choose to declare, per management), we expect downside risks to its income from subsidies.WHAT'S PRICED IN?UBS-S 2019/20E revenue are 13%/14% above consensus, while UBS-S 2019/20E NP are 10/10% below consensus. We think the market maybe a little too optimistic about the sustainability of subsidies Minsheng may receive.Minsheng has been benefiting from Chongqing's support of private education.Minsheng has benefited from its high exposure to Chongqing, where the local government announce a policy highly supportive towards private higher education in Sep 2015. In 2017 for instance, we estimate Minsheng may have earned Rmb71-76m subsidies in Chongqing alone, counting for 69-74% of all subsidies it received and 28-30% of the adjusted NP in that year.Figure 148: Breakdown of Minsheng's 2017 subsidiesFigure 147: Minsheng's student enrolment in ChongqingSource: Company data, UBS-S estimatesSource: MoE, Company data, UBS-S estimates.but its subsidies may not grow proportionally, as it expands geographically beyond Chongqing, which could lead to margin dropsHowever Minsheng's upcoming major expansions are in Yunnan, Shandong, Anhui and Hebei, where the local governments are less generous in their subsidies to private higher education.We expect Chongqing's enrolment contribution to Minsheng to drop from 95% in 2017 to 61%/46% in 2018/19E, as the new schools outside Chongqing consolidate. Subsidies* contribution to adjusted NP could drop from 41% in 2017 to 31 % in 2018/19E, resulting in a margin decline that may not be priced in by the market yet.Figure 149: Minsheng's government subsidies and as % of NPRmb m140Government subsidies (LHS) As % of revenue (RHS)45%40%35%30%25%20%15%10%5%0%2013 2014 2015 2016 2017 2018E 2019E 2020ESource: Company data, UBS-S estimatesFigure 150: Adj. NPMReliance on subsidies looks risky in current regulatory environmentIn addition, we think Minsheng's reliance on subsidies looks risky in the current regulatory environment. Based on the Draft released in August 2018, we think subsidies for for-profit private universities are not likely to be sustainable after the Draft is implemented.Minsheng, with the biggest subsidy contribution to NP, will likely have the biggest earnings downside (industry PQ3 for details).40%Figure 151: Government grants - related to expenses as % of net profit30%20%10%0%37%CEGNHEHopeMinsheng 2015 >2016 >2017Source: Company data, UBS-SUBS-S Researchreturn 个600:UBS-SeConsensus5004003002512001002017-11.7% vs consensus3023422018E-10.1% vsconsensus432388-9.8% vsconsensus482434The market may be pricing in an overly positive margin outlook2019E2020EMinsheng Education GroupWHATS PRICED IN?Adjusted NP: UBS-S est vs consensusRmb mSource: Company data, Thomson Reuters, UBS-S estimatesWe expect downside to consensus margin/earnings forecastsOur analysis in PQ3 suggests that Minsheng could face the biggest EPS downside risk from the Draft, due to its high exposure to government subsidies. However, its share price dropped the smallest post the announcement of the Draft. We think investors are not pricing in the risk of its high reliance on subsidies.Trading at 12.5x 2019E PE or 0.62x PEG (2019E PE divided by 2018-20E EPSCAGR), Minsheng is less attractive than its private university operator peers (Figure 49). We find its value less attractive and believe potential earnings miss to the high consensus expectations could bring downside risk.Figure 152: 2019E EPS downside due to the DraftFigure 153: Share price performance since theannouncement of the Draft0%-2%-4%-6%-8%-10%(2.1%)-12% -14% -16%CEG(13.5%)NHEHope MinshengSource: MoE, Wind, UBS-SSource: UBS-S estimatesUBS-S estimates vs consensusDespite our more bullish top line forecasts, our estimated adjusted NP for 2018-20 are 10-12% below consensus. We expect downside risks to the more bullish consensus GPM and NPM as the market seems to be overlooking the downside risk to government subsidy and the potential risk of rising staff cost under the governments requirement of 18:1 student/ teacher ratio.Figure 154: UBS-S estimates vs consensusSource: Thomson Reuters, UBS-S estimatesRmb m2018E2019E2020EUBS-SeConsensusconsensusBS-SensensusconsensusJBS-Sensensusvs consensusRevenue586633-7.3%99788512.8%1,2061,06013.8%Gross Profit322351-8.1%5324957.4%6386016.2%GPM55.0%55.4%-46 bps53.3%56.0%-265 bps52.9%56.7%-375 bpsEBIT34230711.6%48941717.4%55246219.5%EBIT margin58.4%48.5%991 bps49.0%47.1%194 bps45.8%43.6%220 bpsNet profit302342-11.7%388432-10.1%434482-9.8%Net margin51.5%54.0%-255 bps38.9%48.8%-991 bps36.0%45.4%-942 bpsEPS (Rmb)0.080.09-13.8%0.100.11-12.5%0.110.12-13.5%DPS (Rmb)-0.01-100.0%-0.01-100.0%-0.03-100.0%UBS-S ResearchMinsheng Education GroupUPSIDE/DOWNSIDE SPECTRUMUPSIDE/DOWNSIDE SPECTRUM1569.HK Price3.00HKS1.39EPS (UBS)P/E (UBS)Upside to Downside(Rmb)Implied1 to 22.50return 个Minsheng is trading at HK$1.39 (as of 22 January).0.12 x12.1xUpside:+21%0.10 x10.9xBase:-13%0.07 x9.9xDownside:-42%Source: UBS-SValue driversEnrolmentASPGPMSubsidy income(2019E)growthgrowth(Rmb m)HK$1.68 upside50.9%29.0%55.3%180HK$1.21 base35.9%25.0%53.3%120HK$0.81 downside15.9%21.0%51.3%602.001.501.000.500.00Source: UBS-S estimatesRisk to the current share price is skewed (1:2) to the downsideMinsheng is trading at HK$1.39 (as of 22 January).Upside (HK$1.68): In our upside case, we assume Minsheng's enrolment increases by 51% in 2019E, with an additional deal win for a 10k-student school at a reasonable valuation. We assume blended tuition ASP per student increases by 29%, due to stronger pricing power and more flexible government requirements on pricing. We assume a 55% GPM, on a more relaxed teacher/student ratio requirement. We assume Minsheng records a Rmb180m subsidy income, with other regions also announcing major subsidy support. Our 2019E EPS would be Rmb0.12, up 60% YoY. We assume 12.1x 2019E PE, near the high end of major university