Company Reports

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.

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 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 transfer coverage and take a fresh look at China YuHua Education, or YuHua, leading to a cut in our fair value estimate to HKD 3.06 from HKD 8.80 per share. The cut is attributable to lower growth and margin assumptions. We keep our narrow moat and stable moat trend rating. The shares are trading at about a 56% discount to our fair value estimate due to negative sentiment toward the education sector, which we think is not warranted.

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 place China YuHua Education under review as we are transferring coverage. We will resume coverage by the end of June.

China YuHua Education is one of the large-scale K-12 and higher education private education providers in China. It operates 25 private K-12 schools and four universities (three local highly ranked universities in China and one in Thailand). YuHua Education has in total 138,234 students enrolled, of which 77% are university students, 9% are in high school, 6% from middle schools, 6% from elementary schools and 2% are in kindergarten. The average blended tuition rate in fiscal 2020 is CNY 17,430 and the current utilization rate is 82.6%, with total capacity being 167,300 students.

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%.

China YuHua Education is one of the large-scale K-12 and higher education private education providers in China. It operates 25 private K-12 schools and four universities (three local highly ranked universities in China and one in Thailand). YuHua Education has in total 138,234 students enrolled, of which 77% are university students, 9% are in high school, 6% from middle schools, 6% from elementary schools and 2% are in kindergarten. The average blended tuition rate in fiscal 2020 is CNY 17,430 and the current utilization rate is 82.6%, with total capacity being 167,300 students.