China YuHua Education: Striving for Better Outlook via Organic Growth

We have reviewed our assumptions and are modestly raising our fair value estimate of China YuHua Education to HKD 8.80 from HKD 8.60 as we expect better margin expansion from continued school restructuring efforts with better operating efficiency. We maintain our narrow moat rating and our updated valuation implies 16.5 times forecast fiscal 2022 price/earnings, compared with the peer average of 16.0 times. We expect China YuHua Education’s net profit CAGR to be 59.7% from 2020 to 2025, driven by increasing student enrolment from both student quota and the junior-to-bachelor program (also known as top-up program), tuition hikes, better utilization, and operational efficiency. We believe the company can trade at a premium to its industry peers for the following reasons: 1) it is a large-scale inclusive K-12 and private higher education provider with strong management and operational capability; 2) it has a strong balance sheet with net cash position; and 3) it has solid profitability and a leading position in China, with an above-average forecast fiscal 2021 ROE 34.3% versus industry peers’ 17.3%.