China East Education’s Fair Value Estimate Lowered to HKD 6.10

China East Education 00667 is the largest vocational training education provider in China. It started from and is best known for its culinary arts education. Over the last three decades, it has benefited from the rapid expansion in China’s labor market, which created strong demand for vocational training education. We think that remains a driver for China East over the next five years given continued industrial upgrading and shortage of skilled labor.

China East differentiates itself by offering long term programs lasting from one to three years compared with competitors that focus on short-term programs. It has established a nationwide school network and mainly competes with regional players. We think nationwide presence and reputation give China East an edge over regional players in student recruitment and graduates employment.

As a private vocational training education provider, China East supplements and competes with public vocational education. As the Chinese government steps up efforts to attract more students to vocational stream from academic stream, we anticipate more competition from public vocational schools. Nonetheless, we believe China East continues to appeal to students given its strong brand equity. China East is reacting to the competition by offering similar comprehensive programs offered at public vocational schools besides its traditional skill-oriented programs.

We expect revenue to grow at 12.4% CAGR over the next five years, driven by higher average student enrolment and average tuition fee per student. We forecast gross margin to range from 50% to 52% over the next five years. This is lower than prepandemic levels as we have factored in more competition and lower margins for new schools.

China East tapped into fashion and beauty vocational training education in 2020, the fourth business vertical other than culinary arts, information & internet tech, and auto services. Growth in this segment is exponential, but we expect minimum contribution over the next three years given its small scale.