Company Reports

Edvantage’s fiscal 2024 first-half result was slightly disappointing. Despite 19% revenue growth, the administrative expense ratio rose 3.7 percentage points year on year to 19.6%, resulting in slower net profit growth of 13%. After raising our administrative expense assumptions, we reduce our net income estimate by 2%-6% for fiscal 2024-28. We maintain our HKD 6.10 fair value estimate and narrow moat rating. Trading at 4 times fiscal 2024 price/earnings and only 40% of our fair value estimate, the shares appear undervalued to us, but we believe near-term share price performance could be capped due to policy uncertainty surrounding for-profit classification. Although the process has stalled for over a year, our base case assumes that for-profit classification will be allowed. We anticipate substantial upside with any positive development in the classification process.

Edvantage delivered another year of steady growth with adjusted net income up 15% year on year in fiscal 2023. We expect the trend to continue, underpinned by a 23% jump in new student registration for the 2023-24 school year. After factoring in higher student enrollment, we increase our net income estimates by 7% to CNY 710 million for fiscal 2024 and 9% to CNY 729 million for fiscal 2025. However, we keep our fair value estimate at HKD 6.10 after incorporating higher capital expenditures. The share price is only 39% of our fair value estimate as of Dec. 1. We think the shares looks attractive with nearly 9% projected dividend yield for fiscal 2024. However, we anticipate share price to remain subdued in the near term due to policy uncertainty surrounding for-profit classification.

Edvantage Group is a leading private higher education provider in Greater Bay Area, China. Unlike national players that operate a school network across multiple provinces, Edvantage’s domestic presence is limited to Guangdong and Sichuan provinces. Edvantage benefits from the economic vibrancy, large population inflow, and low gross enrolment rate in the two provinces.

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.

Edvantage delivered a decent fiscal first half (ending February 2023) with revenue and net income up 18.3% and 18.9% year on year, respectively. Student enrollment increased 12.2% to 85,603, exceeding its 83,000 target. We increase our fiscal 2023 earnings estimate slightly to CNY 652 million from CNY 627 million, but our fair value estimate remains HKD 6.10. The shares are attractive, and we think investors may warm to the return to a cash dividend following a script dividend last November that disappointed the market. Edvantage is trading on a projected 7% dividend yield.

Share prices of the three higher education names under our coverage, namely, China Education Group, or CEG; China New Higher Education, or CNHE; and Edvantage, have pulled back 40%-45% since end-January. The three are currently trading around 40%-55% of our fair value estimates. We think the recent share price correction creates attractive buying opportunities. Among the three, we prefer CEG for its established reputation as a leader in vocational education.

Edvantage Group is a leading private higher education provider in Greater Bay Area, China. Unlike national players that operate a school network across multiple provinces, Edvantage’s domestic presence is limited to Guangdong and Sichuan provinces. Edvantage benefits from the economic vibrancy, large population inflow, and low gross enrolment rate in the two provinces.

Edvantage’s full-year fiscal 2022 results are in line with our and the market’s expectations. But shares tumbled as the company chose to offer a script dividend in place of a regular cash dividend. We are disappointed with the change in dividend distribution. We think Edvantage could afford a regular cash dividend. We keep our fair value estimate of HKD 6.10 per share. The shares closed at a 68% discount to our fair value estimate as of Nov. 28. The market capitalization is about the same as the sum of our five-year Stage I discounted cash flow. We think the shares are deeply undervalued. However, we expect share prices to remain subdued in the near term given negative market sentiment.

Edvantage Group is a leading private higher education provider in Greater Bay Area, China. Unlike national players that operate a school network across multiple provinces, Edvantage’s domestic presence is limited to Guangdong and Sichuan provinces. Edvantage benefits from the economic vibrancy, large population inflow, and low gross enrolment rate in the two provinces.

We transfer coverage and take a fresh look at Edvantage Group, leading to a cut in our fair value estimate to HKD 6.10 from HKD 13.00 per share. The cut is attributable to lower growth and margin expectations. We keep our narrow moat and stable moat trend rating. The shares are trading at about a 60% discount to our fair value estimate due to negative sentiment toward the education sector, which we think is not warranted.

Edvantage Group is a leading private higher education provider in Greater Bay Area, China. Unlike national players that operate a school network across multiple provinces, Edvantage’s domestic presence is limited to Guangdong and Sichuan provinces. Edvantage benefits from the economic vibrancy, large population inflow, and low gross enrolment rate in the two provinces.

We are placing Edvantage Group under review as we are transferring coverage. We will resume coverage by the end of June.

Edvantage Group is the largest private higher education group in the Greater Bay Area and provides international environments to students in China and overseas options. It is one of the pioneers in offering overseas schooling options. We believe that the private higher education market would grow rapidly in the Greater Bay Area, driven by: 1) a rapidly growing economy; 2) strong population growth, partly due to many migrant workers; 3) limited higher education resources and low enrolment; and 4) favorable policy.

Edvantage Group is the largest private higher education group in the Greater Bay Area and provides international environments to students in China and overseas options. It is one of the pioneers in offering overseas schooling options. We believe that the private higher education market would grow rapidly in the Greater Bay Area, driven by: 1) a rapidly growing economy; 2) strong population growth, partly due to many migrant workers; 3) limited higher education resources and low enrolment; and 4) favorable policy.

We maintain our narrow moat rating for Edvantage Group and revise up our fair value estimate to HKD 13.00. Our upward revision mostly reflects a higher estimate of earnings growth during the next five years mainly due to solid growth from its new campus expansion and consolidation of the two new schools from Sichuan that were acquired in December 2020. We also expect a better gross margin and operating margin thanks to the successful spin-off from Guangdong University of Finance and Economics into private universities in January 2021.

We maintain our narrow moat rating for Edvantage Group, with a new fair value estimate of HKD 7.8, which implies 18.7 times forecast fiscal 2021 price/earnings, compared with the peer average of 12.1 times. Although Edvantage is a smaller higher education provider compared with its ultra-large-scale higher education peers, we believe Edvantage should trade at a premium to its industry peers’ average given that we are confident in multiple catalysts that will continue to drive a CAGR of 24.1% earnings growth from 2019 to 2024.

Edvantage Group is the largest private higher education group in the Greater Bay Area and provides international environments to students in China and overseas options. It is one of the pioneers in offering overseas schooling options.

We are initiating coverage on Edvantage Group with a DCF-based HKD 5.85 fair value, implying 17.2 times forecast 2020 price/earnings ratio, and with a narrow moat rating, compared with its peer average of 14 times price/earnings. We believe Edvantage Group can trade above its industry peers’ average, on its solid profitability and leading position in the Greater Bay Area in China, and an estimated 2020 solid ROE of 17.6%. In addition, we believe that favorable government policy for the Greater Bay Area should continue to support Edvantage Group’s future growth. Thus, even without near-term M&A growth, we believe that the organic growth with additional new campus capacity built in Sihui, Guangdong, can support the group’s profitability over the next few years.

Edvantage Group is the largest private higher education group in the Greater Bay Area and provides international environments to students in China and overseas options. It is one of the pioneers in offering overseas schooling options.