China Education Sector: No Change to View Despite Slow For-Profit Classification; Shares Attractive

Share prices of the four higher education names under our coverage—China Education Group 00839, China New Higher Education 02001, China YuHua Education 06169, and Edvantage 00382—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.

The four higher education names are currently trading around 33%-50% of our fair value estimates and three to eight times 2023 price/earnings multiples. We think a successful for-profit classification by any higher education school should boost sentiment for the whole sector. Among the four, we continue to like CEG for its established reputation as a leader in vocational education. CEG’s controlling shareholder has purchased more than 1.5% of the total outstanding shares since May, demonstrating its confidence in the business. Meanwhile, we think CNHE’s and Edvantage’s share price should be supported by over 10% and 8% projected 2023 dividend yield, respectively. YuHua is the most undervalued, but we think it will take time for investor confidence to recover from its previous convertible bond default.

Demand for higher education is strong amid a challenging job market. CEG’s enrolment quota for the 2023/24 school year increased by more than 16% year on year. Of this, the degree program quota increased by about 10% boosted by a 20% increase in the top-up degree program, with the diploma program quota increasing by about 56%.