China Education Sector: Recent Share Price Correction Creates Buying Opportunity

Share prices of the three higher education names under our coverage, namely, China Education Group, or CEG; China New Higher Education 02001, 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.

We think a successful for-profit classification by any higher education names, likely before September 2023, should serve as a positive catalyst for the whole sector. For CEG specifically, the company is in active talks with acquisition targets, and a mergers and acquisitions announcement could provide a lift. We also note that CNHE should get support from its projected 9% dividend yield. Among the three, CEG has underperformed both CNHE and Edvantage by about 5%. We think this may be due to its share placement in January, which priced new shares at an 8.8% discount to the then market price and resulted in about a 6% dilution at that time. This move may have raised worries about cash flow risk in the sector, but we think the worries are fully reflected. Particularly, Edvantage is now trading at just 4 times 2023 P/E.

As China’s population starts declining, the student intake will inevitably be affected. Based on our estimate, the population in the junior secondary, senior secondary and higher education age groups will peak in 2026, 2029 and 2032, respectively. Among the three education names, CNHE focuses on higher education whereas CEG and Edvantage have about 20% of students enrolled in secondary vocational education. On the other hand, most schools under CNHE are in less-developed areas while most schools under CEG and Edvantage are in economically vibrant areas. Ultimately, we think demand will depend on the education quality and branding of the schools. Currently, we think CEG leads on that front.