Company Reports

We maintain our fair value estimate at HKD 5.30 following China New Higher Education's, or CNHE's, largely in-line first-half fiscal 2024 results. Our profit forecast is little changed, as our 4%-7% increase in fiscal 2024-28 revenue projections, to reflect higher revenue per student, is offset by lower other income from noncore businesses such as vocational training and property leasing. The shares are trading at 4.3 times 2024 price/earnings and a 12% dividend yield due to uncertainty surrounding for-profit classification. While the process has stalled for more than a year, our base case remains that for-profit higher education will be allowed. We see significant upside with any positive development in the classification process.

China New Higher Education’s, or CNHE’s, fiscal 2023 (ending August) results were in line with our expectations, but the change in dividend schedule is disappointing. CNHE maintained a 50% cash payout ratio, translating to a 12% dividend yield for fiscal 2023 at the current price. However, the final dividend will be distributed next September instead of the usual practice in March. Also, while maintaining the 50% payout ratio in the future, CNHE will cancel the interim dividend and only distribute the final dividend in September annually. While the arrangement helps reduce financing costs, we believe this practice is slightly negative to shareholders from a cash flow perspective. In addition, the change could raise doubt over its cash flow situation and the sustainability of its dividend payout.

China New Higher Education, or CNHE, is the third-largest private higher education group in China by student enrolment. CNHE focuses on higher vocational education, and it strives to prepare students for quality employment. We think a high graduate employment rate helps CNHE achieve steady growth in student enrolment.

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 New Higher Education further raised its interim dividend following a decent fiscal first half (ending February 2023) that recorded steady revenue and earnings growth of 9.2% and 13.1%, respectively. The proposed interim dividend translates to a 47.6% payout ratio. We keep our full-year 50% payout ratio forecast, leading to a projected 9.5% dividend yield at the current price level. We believe the generous dividend can be maintained, given CNHE's steady performance and improving balance sheet. We increase our fiscal 2023 earnings estimate slightly to CNY 715 million from CNY 708 million. Our fair value estimate remains HKD 5.30, with 94% upside from its current share price.

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.

China New Higher Education, or CNHE, is the third-largest private higher education group in China by student enrolment. CNHE focuses on higher vocational education, and it strives to prepare students for quality employment. Its graduate employment rate reached 98% last year, 700 basis points higher than the national average. We think this helps CNHE achieve steady growth in student enrolment.

China New Higher Education’s fiscal 2022 results are in line with our expectations. Notably, it raised its final cash dividend, translating into a 50% full-year payout ratio inclusive of its interim dividend. CNHE positions itself as a utility stock that provides stable income returns to investors, so we expect CNHE to maintain its 50% dividend payout ratio. We keep our fair value estimate of HKD 5.30 and CNHE looks attractive, particularly as it currently trades at an implied 9% dividend yield and 52% discount to our fair value estimate.

China New Higher Education, or CNHE, is the third-largest private higher education group in China by student enrolment. CNHE focuses on higher vocational education, and it strives to prepare students for quality employment. Its graduate employment rate reached 98% last year, 700 basis points higher than the national average. We think this helps CNHE achieve steady growth in student enrolment.

Based on our channel check, Harbin Huade University, a higher education school under China New Higher Education, or CNHE, has received preliminary approval to be classified as a for-profit school. Besides Harbin Huade, two other private higher education schools in the same province also received preliminary approval. We believe this marks a positive step forward for regulations in the education sector and the market should react positively. The uncertain legal status of the higher education schools after imposition of nonprofit status on the compulsory education schools and K-9 academic after-school tutoring service providers has been a risk to the sector. We believe the approval sends a clear policy signal and should reduce the regulatory overhang. CNHE’s shares are trading at a 52% discount to our HKD 5.30 fair value estimate due to negative sentiment. We think the approval should boost investor confidence. As the successful for-profit classification has been our base case assumption, the approval does not change our estimates. We keep our forecast for revenue and net profit to grow at 12.3% and 9.7% CAGR from 2022 to 2026, respectively.

We transfer coverage and take a fresh look at China New Higher Education, or CNHE, leading to a cut in our fair value estimate to HKD 5.30 from HKD 9.90 per share. We have reduced our growth and margin assumptions to reflect the change in business strategy. The shares are trading at about a 50% discount to our fair value estimate due to negative sentiment toward the education sector, which we think is not warranted. We project a dividend yield of 8.6% for 2022 at the current price level. This looks attractive to us.

China New Higher Education, or CNHE, is the third-largest private higher education group in China by student enrolment. CNHE focuses on higher vocational education, and it strives to prepare students for quality employment. Its graduate employment rate reached 98% last year, 700 basis points higher than the national average. We think this helps CNHE achieve steady growth in student enrolment.

We are placing China New Higher Education under review as we are transferring coverage. We will resume coverage by the end of June.

China New Higher Education, or CNHE, is one of the few education companies in China providing private formal undergraduate and vocational higher education focused on applied sciences. CNHE sees organic growth that benefits from rising demand for private education in China and also opportunities through acquisitions. Of the seven schools that it owns, five were acquired. This tends to be characteristic of larger education groups in the industry, given regulatory and location barriers.

China New Higher Education, or CNHE, announced on May 25, 2021 that Daai Education entered into the Guangxi Equity Transfer Agreement where Daai Education has agreed to acquire the remaining 10% equity interest of Songming Xinjju from Huzhou Shenhang for a consideration of CNY 64 million. Upon completion of this acquisition of Guangxi Schools, Songming Xinju will become 100%-owned by Daai Education, which is a subsidiary of CNHE group. We view this as positive for CNHE given that they will have full control of the schools and will be able to provide better synergy and improved operational efficiency.

China New Higher Education, or CNHE, is one of the few education companies in China providing private formal undergraduate and vocational higher education focused on applied sciences. CNHE sees organic growth that benefits from rising demand for private education in China and also opportunities through acquisitions. Of the seven schools that it owns, five were acquired. This tends to be characteristic of larger education groups in the industry, given regulatory and location barriers.

We initiate coverage of China New Higher Education with a fair value estimate of HKD 4.56 and a no-moat, stable moat trend rating. CNHE is one of the large-scale private higher education providers in China, focused on providing degrees in applied sciences through seven schools located primarily in central and western China. We think that CNHE is trading at fair value, with our fair value estimate implying 11.6 times 2021 price/earnings.

China New Higher Education is one of the few education companies in China providing private formal undergraduate and vocational higher education focused on applied sciences. CNHE sees organic growth that benefits from rising demand for private education in China and also opportunities through acquisitions. Of the seven schools that it owns, five were acquired. This tends to be characteristic of larger education groups in the industry, given regulatory and location barriers.