The Company expected 1H20E adj. NP to drop by 45-50% as new student enrollment was affected due to outbreak of COVID-19. That said, we think the fundamentals of the Company remains intact. The new beauty school performs better than management’s expectation. This segment could be a new growth driver and serve as re-rating catalyst. Our TP is adjusted from HK$15.80 to HK$21.10, 31.7x FY21E P/E (at 15% discount to education sub-sector leaders’ average of 37.3x). Maintain Buy.
- Profit alert. Due to outbreak of COVID-19, schools were suspended temporarily and number of new student enrollments fell by around 20%, which caused revenue to decline by 15-20% in 1H20E. The Company expects 1H20E NP and adj. NP to fall by 20-25% and 45-50%, respectively.
- Recovering notably since end of Zhongkao. Percentage of schools reopened increased from 50% in end of May to 90% in end of June and >90% currently. On the other hand, certain schools in Beijing, Xinjiang and Northeastern China are still affected by COVID-19. However, since the end of Zhongkao in mid-July, number of new student enrollments has been picking up notably.
- Ramp-up of new beauty school better-than-expected. The beauty training school opened in Chengdu has around 300 students. Because Jul-Sep is the biggest new student enrollment in a year, number of students of the schools could exceed target of 400-500 students in FY20E. The Company plans to open two new beauty training schools in Zhengzhou and Changsha in 2H20E. If the ramp-up of these two schools are strong, the Company could accelerate beauty training expansion. The beauty services industry is fragmented. Some large beauty services operators provide in-house training for its staff. Competitors mainly offer short-term courses which cannot control graduates’ quality well. There is opportunity for the Company to provide quality training through long-term courses to meet the industry’s demand for talents.
- Maintain Buy. We revised down FY20/21/22E adj. NP by 9%/3%/4% to factor in lower student enrollments. Our TP is revised from HK$15.80 to HK$21.10, based on 31.7x FY21E adj. P/E which is at 15% discount to education sub-sector leaders’ average of 37.3x (vs 26x average FY20E and FY21E adj. EPS previously). We forecast the Company to post 25% adj. EPS CAGR in FY20-22E. Catalyst: M&A. Risk: lower-than-expected student enrollment.
