China Education Group Earnings: Decent Enrollment Growth; On Track to Meet Full-Year Target

China Education Group 00839 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.

CEG has obtained a lease for the previously free allocated land at its Jiangxi school for less than CNY 100 million. This clears the major obstacle in the for-profit classification process, so we think the Jiangxi school has a good chance to complete for-profit classification in the next six months.

Higher vocational education segment revenue rose 20.6% year on year, driven primarily by a 14.6% increase in student enrollment. This segment accounted for 85% of revenue in the first half, up from only 65% in fiscal 2020, largely due to the acquisition of Haikou University of Economics and Chengdu Jincheng College. Although CEG held only a 60% stake in Haikou, it was entitled to 100% of profits under a management contract, which expired in February. Management hinted at the possibility of acquiring the remaining minority stake. CEG had a private placement in January for potential merger and acquisition opportunities in the secondary market. We think the deal is probably stalled.

The secondary vocational education segment recorded a slight revenue decline in the first half as student enrollment declined due to the COVID-19 lockdown. Management mentioned that CNY 400 million in assets related to the secondary vocational education segment might be impaired. We have not factored the impairment into our forecast. Regardless, the impairment is a one-off noncash item that does not affect our cash flow-driven fair value estimate.