Near-Term Limited Impact on China East Education from Coronavirus; Long-Term Positive

We are adding narrow-moat-rated China East Education to the Best Ideas list. The company is trading below our fair value estimate of HKD 18.80 with an attractive valuation. Our fair value estimate implies 30.6 times 2020 forecast price/earnings multiple. We expect China East Education’s five-year net profit CAGR to grow at 35.9%. This is driven by an increase in student enrolment and an increase in tuition fee. China East Education is expanding on its school expansion while also increasing operational efficiency. The initiatives are supported by a strong balance sheet and strong cash inflows that bring in ample interest incomes. China East Education’s operating cash flow maintained steady increase in the past three years, primarily due to the gradual increase in tuition and services fees. We expect the upward trend to continue in the next five years, with rising net operating cash flow. Capital expenditure will be allocated to the expansion of the school network, renovation and upgrade of school facilities, and the purchase of teaching equipment. The company will also establish five geographical regional centres. Thus, we believe that China East Education should continue to benefit from solid growth in the future.