Company Reports

We will discontinue analyst coverage of China YuHua Education on or about Sept. 2. We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Excluding the discontinued operation and on a like-for-like basis, China YuHua's first-half fiscal 2025 (ending August) revenue grew by 7% year on year, and gross margin rose to 46.8% from 33.3% a year ago. Shares gained 20% after the results.

China YuHua Education used to be known for its complete coverage of kindergarten to university education. Following the deconsolidation of K-9 assets in 2021, YuHua only operates schools at higher education and secondary education level, and it generates more than 90% of revenue from the higher education schools.

China YuHua's fiscal 2024 (ended August) net profit of CNY 399 million fell short of our forecast of CNY 534 million due to a goodwill impairment of CNY 181 million. However, the capital expenditure was significantly lower than anticipated. We keep our forecasts largely unchanged, but have increased our fair value estimate to HKD 1.04 per share from HKD 0.89, accounting for the reduced capital expenditure in fiscal 2024. Currently, YuHua is trading at just 40% of our valuation and at a 2 times fiscal 2025 price/adjusted earnings multiple. With capex declining from its peak and the balance of its convertible bond to be settled in shares in March, we believe the worst is over for YuHua and consider the shares to be a good buy.

China YuHua Education used to be known for its complete coverage of kindergarten to university education. Following the deconsolidation of K-9 assets in 2021, YuHua moved closer to peers that only operate schools at higher education and secondary education level.

We think YuHua’s proposal to settle its convertible bond with a mix of cash and new shares is a positive move to remove the default risk that has persisted for two years. The disposal of its Thailand school is also value-accretive, in our view. As a result, we raise our fair value estimate to HKD 0.89 per share from HKD 0.80. Despite YuHua being deeply undervalued, we believe the risk of share disposal by bondholders after settlement and the overhang from its for-profit school classification will remain key concerns for investors. Our preferred pick is China East Education, trading at a 37% discount to our fair value estimate, with earnings likely having bottomed in 2024.

China YuHua Education used to be known for its complete coverage of kindergarten to university education. Following the deconsolidation of K-9 assets in 2021, YuHua moved closer to peers that only operate schools at higher education and secondary education level.

Share prices of the higher education names under our coverage, China Education Group, or CEG; China New Higher Education, or CNHE; China YuHua Education; and Edvantage, are trading near historical lows, with investors staying sidelined due to for-profit classification overhang. It's been two years since some schools received preliminary approval, but none have been officially classified as for-profit schools. Nonetheless, our base case remains that for-profit classification will proceed. We do not think China will make all higher education schools nonprofit as funding more education adds to the already stretched finances of local governments.

China YuHua Education’s fiscal first-half 2024 results are disappointing. Capital expenditure remained high at 1.4 times of its interim revenue, and gross margin fell by 12.5 percentage points to 34.4% because of higher depreciation and staff costs. After adjusting our margin and capex assumptions, we cut our fair value estimate to HKD 0.80 per share from HKD 1.50. YuHua’s shares fell 4% ahead of the result release, and we think further negative reaction may persist in the near term. We see risk to our fair value estimate from possible dilution as YuHua extends its convertible-bond repayment.

China YuHua Education used to be known for its complete coverage of kindergarten to university education. Following the deconsolidation of K-9 assets in 2021, YuHua moved closer to peers that only operate schools at higher education and secondary education level. However, YuHua’s secondary schools are academically focused and face higher regulatory risk compared with secondary vocational schools.

China YuHua Education used to be known for its complete coverage of kindergarten to university education. Following the deconsolidation of K-9 assets in 2021, YuHua moved closer to peers that only operate schools at higher education and secondary education level. However, YuHua’s secondary schools are academically focused compared with vocational programs for other higher education providers under our coverage. This means YuHua has higher regulatory risk.

China YuHua Education’s share price plunged after the firm indicated it would need an extension to its convertible bond repayment. The huge capital expenditure in fiscal 2023 (ending August) was also disappointing. We keep our earnings forecasts largely unchanged, but cut our fair value estimate by 27% to HKD 1.50 on higher capital expenditure in fiscal 2023 and beyond. While shares are significantly undervalued, we think the share price will remain depressed due to uncertainty about its convertible bond.

Share prices of the four higher education names under our coverage, China Education Group, or CEG; China New Higher Education, or CNHE; China YuHua Education, or YuHua; and Edvantage, have fallen by 30%-38% year-to-date. We think the uncertainty in for-profit classification has pressured their share price performance. It's been a year since some schools received preliminary approval, but so far none has been officially classified as a for-profit school. Nonetheless, an increasing number of provinces have asked local higher education schools to make for-profit/non-profit selections over the past few months. Our base case remains that for-profit classification will proceed. We think it is very unlikely that the government will make all higher education schools non-profit as this will create heavy financial burdens for the government.

We have lowered our fair value estimate for YuHua to HKD 2.06 from HKD 2.42 based on the disappointing first-half (ending February 2023) results. Revenue declined by 1.2% year on year due to lower student enrolment in its high schools. The sharp contraction in gross margin to 46.9% from 56.6% and 67.2% in the first half of fiscal 2022 and 2021, respectively, is more concerning, as the company continues to invest heavily in its campuses and teachers. As a result, the revenue and margin trends are significantly underperforming higher education peers we cover. We lower our revenue forecast to CNY 2.4 billion from CNY 2.5 billion and our net income forecast to CNY 1.1 billion from CNY 1.4 billion in fiscal 2023. We also lowered our revenue and margin forecasts through fiscal 2027, resulting in a net income CAGR of negative 4.3% from fiscal 2022 to 2027, down from our prior negative 0.1% forecast. The shares closed 47% below our fair value estimate on May 2, but we suggest investors stay on the sideline until positive catalysts emerge.

China YuHua Education, or YuHua, used to be known for its complete coverage of kindergarten to university education. Following the deconsolidation of K-9 assets in 2021, YuHua moved closer to peers that only operate schools at higher education and secondary education level. However, YuHua’s secondary schools are academically focused compared with vocational programs for other higher education providers under our coverage. This means YuHua has higher regulatory risk.

China YuHua’s share price was up 18% on Feb. 28 after the company announced its delayed fiscal 2022 (ending August) results and resumed trading. This is expected given the 10%-50% share price gains by peers amid improving sentiments while YuHua’s shares were suspended for trading. We marginally increase our fair value estimate to HKD 2.42 from 2.32 after adjusting our model. While we think YuHua is undervalued, we believe YuHua will trade at a valuation discount to peers with share price performance capped in the near term due to the lack of investors’ confidence following its convertible bond default.

China YuHua Education, or YuHua, used to be known for its complete coverage of kindergarten to university education. Following the deconsolidation of K-9 assets in 2021, YuHua moved closer to peers that only operate schools at higher education and secondary education level. However, YuHua’s secondary schools are academically focused compared with vocational programs for other higher education providers under our coverage. This means YuHua has higher regulatory risk.

We lower our Morningstar Uncertainty Rating on China YuHua to Very High from Extreme to reflect better visibility after the company obtained a waiver from convertible bond holders on its early redemption obligation. This should clear the way for YuHua to publish its full-year 2022 results and resume trading in its shares. While we think investor confidence will remain dampened on governance concerns and YuHua is likely to trade at a discount to peers such as China Education Group, it is worth noting that the share prices of the higher education names under our coverage have jumped more than 50% since YuHua ceased trading. This could help propel YuHua’s share price up. YuHua’s 2022 annual results should be available soon since the delay was solely due to auditor’s concerns over YuHua’s ability to fully redeem its convertible bonds at the end of 2022. We leave our weighted average cost of capital at 15% and fair value estimate at HKD 2.32 pending more information from its 2022 annual report.

China YuHua Education, or YuHua, used to be known for its complete coverage of kindergarten to university education. Following the deconsolidation of K-9 assets in 2021, YuHua moved closer to peers that only operate schools at higher education and secondary education level. However, YuHua’s secondary schools are academically focused compared with vocational programs for other higher education providers under our coverage. This means YuHua has higher regulatory risk.

We raise our Morningstar Uncertainty Rating on China YuHua to Extreme from Very High following questions over its financial status. Trading in China YuHua’s shares have been suspended pending publication of annual results as the auditor was unable to ascertain whether YuHua has sufficient financial resources offshore to meet potential convertible bonds redemption obligations by Dec. 27, 2022. Channel checks with other China education companies indicate that situation is unique to China YuHua. Our weighted average cost of capital rises to 15% from 11.7% after factoring heightened credit and equity risk. We make minor tweaks to reflect the weak Chinese yuan and leave our core operating assumptions unchanged until more information is provided. The higher risk measures and unfavorable exchange rate lead to a cut in our fair value estimate to HKD 2.32 from HKD 3.06.