China East Education’s FVE Reduced to HKD 6.10 on Slower Enrolment

China East Education’s 00667 subdued second-half 2022 results unsurprisingly reflected the COVID-19 lockdowns that hurt student recruitment. Soft new student enrolment in 2022 will negatively affect future periods as the programs last up to three years. As a result, we revise our 2023 revenue and net income forecasts to CNY 4.4 million and CNY 400 million, down 6.5% and 7.1%, respectively, from our original estimates.

We marginally lower our fair value estimate to HKD 6.10 from HKD 6.30. The shares currently trade at a 25% discount to our fair value estimate, but we think China Education Group offers a better risk/reward at a 42% discount to our fair value estimate.

New student enrolment increased by about 16% as of March 23. Specifically, the culinary arts segment was up 15% year on year, the information and internet technology segment was up 10%, and the auto services segment was up 25%. Management guided for at least 20% year-on-year growth in 2023. We think this is achievable given a low base in the second half of 2022. This should drive average student enrolment up about 13% in 2023. Factoring in modest tuition hikes, we forecast revenue to grow 15.6% in 2023.

As China East emerges from the pandemic, we forecast gross margin to improve to 50.6% in 2023 from 49.5% in 2022. This should be driven by a recovery in its culinary arts segment. Culinary arts, which accounted for 59% of revenue and 60% of gross profits in 2022, has been the hardest hit over the past three years. However, we do not see gross margin recovering to prepandemic levels over the next five years due to intense competition. We expect average tuition to rise only about 3% per year, lagging average teaching staff compensation growth. We forecast teaching staff costs as a percentage of revenue to remain high at 17.9%-19.4% over the next five years, compared with 13.3% in 2019.