Company Reports

We cut our fair value estimate for China Education Group to HKD 11.50 from HKD 12.10 as the planned capital expenditure exceeds our expectations. CEG’s shares are trading at less than five times forward 2024 price/earnings and at an over 9% dividend yield, but we think its share price will remain subdued before uncertainty surrounding its for-profit classification is resolved. CEG’s schools made no progress in for-profit classification in the first half of fiscal 2024.

China Education Group is one of the largest private higher education providers in China. Over the years, it has built a strong portfolio of higher vocational education schools. Many of CEG's schools are in economically vibrant areas. Large population inflows and low gross enrollment rates create strong demand for quality education in such areas. We expect CEG to continue benefiting from that.

Narrow-moat China Education Group’s share price tumbled 18.5% on disappointing fiscal 2023 (ended August) results amid asset impairments, higher capital expenditures, and lower gross margin. We believe investors are probably worried about further write-downs of its schools. We think this is possible, as CEG stopped breaking down student enrollment by school three years ago. While total student enrollment growth remains robust, some schools may be not faring as well. CEG also merged higher and secondary vocational education into one segment and stopped breaking down revenue this year. The lowered transparency is disappointing.

China Education Group is one of the largest private higher education providers in China. Over the years, it has built a strong portfolio of higher vocational education schools. Many of CEG's schools are in economically vibrant areas. Large population inflows and low gross enrollment rates create strong demand for quality education in such areas. We expect CEG to continue benefiting from that.

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.

China Education Group delivered a decent fiscal first half (ended February) with revenue up 18% and adjusted net income up 15.1% year on year, hitting 49% and 53% of management’s full-year guidance, respectively. Student enrollment increased 10% to about 340,700. We are keeping our fiscal 2023 earnings estimate at CNY 2 billion, and our fair value estimate remains HKD 13.20 per share. The shares closed at a 47% discount to our fair value estimate on April 28. We think a successful for-profit classification would serve as a positive catalyst.

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.

We're keeping our fair value estimate for China Education Group at HKD 13.20 per share following the company's share placement announcement. CEG completed a private placement of 147 million new shares, representing 6.17% of the outstanding shares before the placement, at HKD 10.94 per share. The issuance price was 17% below our fair value estimate and 8.8% below the Jan. 9 market closing price. CEG’s share price was down 5.5% on Jan. 10 due to dilution concerns, but we think the market has overreacted, since the placement would only reduce our fair value estimate by about 1%. Nonetheless, CEG’s share price has rebounded about 150% from its October 2022 lows. We consider the shares fairly valued at a 14% discount to our fair value estimate. We would prefer a higher margin of safety before buying.

China Education Group, or CEG, delivered an in line full-year 2022 result and raised its dividend in a move that should appease shareholders and provide some support to its share price. The proposed dividend brings the full-year cash payout ratio to 44% on an adjusted net income basis and on par with historical years, despite the cancelation of an interim dividend in favor of a stock re-purchase. We think this reflects management’s willingness to reward shareholders. CEG has a good record of dividend distribution with an average payout ratio of 46.8% from 2019 to 2021, which is among the highest of listed China higher education peers.

China Education Group, or CEG, is one of the largest private higher education providers in China. Over the years, it has built a strong portfolio of higher vocational education schools. Many of CEG's schools are in economically vibrant areas. Large population inflow and low gross enrollment rate create strong demand for quality education in such areas. We expect CEG to continue benefiting from that.

China Education Group, or CEG, is one of the largest private higher education providers in China. Over the years, it has built a strong portfolio of higher vocational education schools. Many of CEG's schools are in economically vibrant areas. Large population inflow and low gross enrollment rate create strong demand for quality education in such areas. We expect CEG to continue benefiting from that.

All the seven undergraduate schools under narrow-moat China Education Group, or CEG, have recorded robust growth in student admissions for the 2022/2023 school year. The impressive admission numbers reinforce our view that CEG can achieve decent organic growth. We keep our estimates for revenue and net income to grow at 13% and 11% CAGR from 2022 to 2026, respectively. Investor sentiment for the sector remains weak and CEG’s shares are trading at a 53% discount to our HKD 13.20 fair value estimate. We anticipate CEG should announce for-profit classification of its Jiangxi University of Technology toward end-2022 and we think this will help boost confidence.

We transfer coverage and take a fresh look at China Education Group, or CEG, leading to a cut in our fair value estimate to HKD 13.20 from HKD 22 per share. The cut is mainly attributable to lower earnings growth assumptions for our 10-year stage II period. Our near-term earnings estimates are largely unchanged. We keep our narrow moat and stable moat trend rating. The shares are trading at about a 50% discount to our fair value estimate due to negative sentiment toward the education sector given policy concerns, which we think is not fully warranted for CEG.

China Education Group, or CEG, is one of the largest private higher education providers in China. Over the years, it has built a strong portfolio of higher vocational education schools. Many of CEG's schools are in economically vibrant areas. Large population inflow and low gross enrollment rate create strong demand for quality education in such areas. We expect CEG to continue benefiting from that.

China Education Group, or CEG, is a large-scale, leading provider of private higher education in China, operating two well-recognized higher education institutions ranked among the top 100 in terms of overall competitive strength among many well-established schools. Students graduating from schools operated by CEG benefit from the schools’ strong relationships with quality employers and enterprises and its student-centric career services.

We maintain our narrow moat rating for China Education Group, or CEG, and fair value estimate of HKD 22.0, which is 25.7 times fiscal 2022 price/earnings. Our fair value and earnings revision mainly reflects strong fiscal 2021 net profits growth due to better-than-expected margin improvement and consolidation of the newly acquired schools. We remain positive on CEG given it is one of the leading higher education operators in China; year to date, CEG has been expanding footprints over six Chinese provinces, with seven higher education schools and four vocational schools, while overseas higher education expansion includes two schools in Australia and England. Currently, CEG has a total student enrolment of approximately 250,300 students by the end of 2021. In addition, CEG is backed by its strong financial position with a solid execution record.

China Education Group, or CEG, is a large-scale, leading provider of private higher education in China, operating two well-recognized higher education institutions ranked among the top 100 in terms of overall competitive strength among many well-established schools. Students graduating from schools operated by CEG benefit from the schools’ strong relationships with quality employers and enterprises and its student-centric career services.

China Education Group, one of the ultra-large-scale private higher education providers in China is currently trading below our fair value estimate of HKD 14.92 with an attractive valuation. Our fair value estimate implies a 27.6 times 2021E price/earnings multiple. We expect China Education Group’s 2020 net profit to grow at 39.5%, mostly driven by new school consolidations, student enrollment, ASP, and also blended mixed between programs offered by the school. We expect its five-year net profit CAGR to grow at 20.2%. While CEG continues to expand on its schools both organically and through M&A, we expect its operational efficiency in both existing and newly established schools should also improve.

China Education Group, or CEG, is a large-scale, leading provider of private higher education in China, operating two well-recognized higher education institutions ranked among the top 100 in terms of overall competitive strength among many well-established schools. Students graduating from schools operated by CEG benefit from the schools’ strong relationships with quality employers and enterprises and its student-centric career services.