Company Reports

China East Education is the largest vocational training education provider in China. It started from and is best known for its culinary arts education. Over the last three decades, it has benefited from the rapid expansion in China’s labor market, which created strong demand for vocational training education. We think that remains a driver for China East over the next five years given continued industrial upgrading and shortage of skilled labor.

China East Education's 2023 earnings missed our expectations due to margin contraction, although revenue was in line, which we attribute to increasing challenges in student recruitment amid rising competition. Based on the disappointing results, we adjust our student enrollment and margin forecasts and cut our net income estimates by 17%-21% for 2024 through 2027, reducing our fair value estimate by 12% to HKD 5.36. Despite the cut, we think it is time to buy narrow-moat China East, as we believe its earnings have bottomed out and expect margin to recover in the coming years. We now project CNY 422 million net income in 2024, up 55% year on year. In addition, the proposed dividend translates to an 8.3% dividend yield based on the March 28 share price, and management intends to keep the dividend amount stable. We think the dividend provide downside protection while the anticipated earnings rebound offers upside potential.

We think China East Education’s 2023 results are likely to fall short of our expectation amid a challenging economy that is hurting demand for its short-term programs as the outlook for jobs remains weak. As such, we lower our average student enrolment growth assumption to 3% from 5% year on year. We also reduce our average tuition fee growth forecast to 2% from 4%. This results in a 10% cut in our net income estimate to CNY 349 million for 2023, down 5% year on year.

China East Education’s first-half earnings missed our and consensus expectations with adjusted net income down 2.7% despite revenue up 4% year on year, as operating margin for core business New East Culinary Education fell sharply to 17.9% from 28.5% a year ago. The operating margin contraction was a combined result of a 5-percentage-point decline in gross margin and 5.5-percentage-point increase in the operating expense ratio. We have overestimated the rate of recovery in average student enrollment and underestimated the need for higher advertisement spending to boost brand awareness amid rising competition from public schools. On a positive note, new student enrollment for New East grew 26% year on year in the first half, suggesting steady recovery from the pandemic. The tuition fee for New East was adjusted back to its first-half 2020 level. Management also guided for selling expense to stabilize after 2023. This should help with margin recovery.

China East Education is the largest vocational training education provider in China. It started from and is best known for its culinary arts education. Over the last three decades, it has benefited from the rapid expansion in China’s labor market, which created strong demand for vocational training education. We think that remains a driver for China East over the next five years given continued industrial upgrading and shortage of skilled labor.

China East Education’s subdued second-half 2022 results unsurprisingly reflected the COVID-19 lockdowns that hurt student recruitment. Soft new student enrolment in 2022 will negatively affect future periods as the programs last up to three years. As a result, we revise our 2023 revenue and net income forecasts to CNY 4.4 million and CNY 400 million, down 6.5% and 7.1%, respectively, from our original estimates.

We reduce revenue and earnings estimates for narrow-moat China East Education after lowering our student enrolment and tuition fee assumptions following the release of interim results. We now forecast 2022 revenue and net income of CNY 4,086 million and CNY 394 million, down from original estimates of CNY 4,528 million and CNY 471 million, respectively. In addition, we expect revenue to grow at a CAGR of 8.2% from 2022 to 2026, down from 9.3%. Accordingly, we see a net income CAGR of 19.7%, down from 22.9%, over the next five years. As a result, we lowered our fair value estimate to HKD 6.30 from HKD 6.70 per share. China East is trading at a 53% discount to our fair value estimate due to near-term headwinds and negative sentiment toward the education sector. We think this presents a good opportunity for long-term investors.

China East Education is the largest vocational training education provider in China. It started from and is best known for its culinary arts education. Over the last three decades, it has benefited from the rapid expansion in China’s labor market, which created strong demand for vocational training education. We think that remains a driver for China East over the next five years given continued industrial upgrading and shortage of skilled labor.

We reduced revenue and earnings estimates for China East after factoring in the pandemic's impact in the near term and slower expansion in the medium term. We now forecast 2022 revenue and net income of CNY 4,528 million and CNY 471 million, down from original estimates of CNY 4,655 million and CNY 510 million, respectively. In addition, we expect revenue to grow at a CAGR of 9.3% from 2022 to 2026, down from 10.9%, as China East has cut back on expansion plans. Accordingly, we see net income CAGR of 22.9%, down from 26.9%, over the next five years. As a result, we lowered our fair value estimate to HKD 6.70 from HKD 7.10 per share. China East closed on Aug. 2 with a market cap of HKD 6.7 billion, or approximately CNY 5.8 billion, compared with a net cash and investment position of CNY 5 billion as of December 2021. We think the market is overly bearish especially given our forecast annual free cash flow of CNY 490 million-CNY 1.1 billion through 2026. That said, we raised our Uncertainty Rating to Very High from High to reflect higher uncertainty from the pandemic, economic conditions, and competition from public schools.

China East Education is the largest vocational training education provider in China. It started from and is best known for its culinary arts education. Over the last three decades, it has benefited from the rapid expansion in China’s labor market, which created strong demand for vocational training education. We think that remains a driver for China East over the next five years given continued industrial upgrading and shortage of skilled labor.

China East Education is the largest vocational training education provider in China. It started from and is best known for its culinary arts education. Over the last three decades, it has benefited from the rapid expansion in China’s labor market, which created strong demand for vocational training education. We think that remains a driver for China East over the next five years given continued industrial upgrading and shortage of skilled labor.

We transfer coverage and take a fresh look at China East Education, leading to a cut in our fair value estimate to HKD 7.10 from HKD 21.00 per share. The cut is attributable to lower revenue and margin assumptions over the next five years as we factor in the impact of intensifying competition and ongoing pandemic restrictions. Despite the challenges, we think China East’s long-term outlook remains positive. It is worth noting that China East had a net cash and investment position of CNY 5 billion as of December 2021. In addition, we forecast CNY 560 million to CNY 1.3 billion free cash flow over the next five years.

As China’s largest vocational training education provider, China East Education Holdings provides students with solid and the latest knowledge and practical skill at its training centers and studios. Its business spans three segments: culinary arts, information and Internet technology, and auto services. China East Education also offers career counseling services to help its graduates find jobs through its close school enterprise relationships with a strong network of over 500,000 alumni across the country to share their working experiences and provide the latest insight into the job market with its graduates and over 27,000 enterprise corporations.

As China’s largest vocation training education provider, China East Education Holdings provides students with solid and latest knowledge and practical skill at its training centers and studios. Its business spans three segments: culinary arts, information and Internet technology, and auto services. China East Education also offers career counseling services to help its graduates find jobs through its close school enterprise relationships with a strong network of over 500,000 alumni across the country to share their working experiences and provide the latest insight on the job market with its graduates and over 27,000 enterprise corporations.

After factoring in a deeper impact from the pandemic in 2020, we lower our 2021 and 2022 earnings estimates for China East Education, and reduce our fair value estimate to HKD 21.00 from HKD 21.50. The suspension of courses impacted student enrolment in 2020, and the carry over effect also hurts average fees as courses were extended. Nevertheless, we have raised our revenue forecasts for the next three years due to delayed student matriculation and registrations in 2020 leading to increased revenue recognition in 2021. In addition, we are seeing a few more catalysts that may be driving revenue growth, aside from lower base, such as: 1) product mix shift to a three-year long-term program thanks to market demand and new course offerings--24% of the students enrolled into a three-year long-term program in 2020, up from 16% in 2019; and 2) increasing demand for technical skills, internships and also official diploma programs supported by favorable government policy for vocational schools. Hence, with activity likely to normalize, we expect the company’s five-year net profit CAGR to remain strong at 52.4% (low base from 2020). Excluding 2020, we forecast four-year revenue growth CAGR from 2021-25 of 20.5% versus China East’s historical four-year average of 26.1% from 2015-19. We believe challenges consist mainly of pandemic-related delays to revenue and China East’s operations should rebound comfortably.

As China’s largest vocation training education provider, China East Education Holdings provides students with solid and latest knowledge and practical skill at its training centers and studios. Its business spans three segments: culinary arts, information and Internet technology, and auto services. China East Education also offers career counseling services to help its graduates find jobs through its close school enterprise relationships with a strong network of over 500,000 alumni across the country to share their working experiences and provide the latest insight on the job market with its graduates and over 27,000 enterprise corporations.

We maintain our narrow moat rating, with a new fair value estimate of HKD 21.50 as we roll over to 2021 price/earnings, which implies 28.6 times forecast fiscal 2021 price/earnings, compared with the peer average of 12.1 times. We believe China East Education should trade at a premium to its industry peers’ average given its scale, and nature of the business model that has less exposure to China government policy risks. This is especially as we believe more favorable government policy has been implemented to promote job training related programs and higher education, which would be an advantage for China East Education.

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.

We are initiating coverage of China East Education with a DCF-based HKD 18.80 fair value estimate and narrow-moat rating. Our fair value estimate implies 30.6 times 2020 price/earnings multiple with 21.8% upside from current level. We expect China East Education’s five-year net profit CAGR to grow at 35.9%, on the back of the following factors:

As China’s largest vocation training education provider, China East Education provides students with solid and latest knowledge and practical skill at its training centres and studios. Its business spans three segments: culinary arts, information and internet technology, and auto services. China East Education also offers career counselling services to help its graduates find jobs through its close school enterprise relationships with a strong network of over 500,000 alumni across the country to share their working experiences and provide the latest insight on the job market with its graduates and over 27,000 enterprise corporations.