High growth potential and a handful of recent IPOs in China’s education sector has created an acquisition boom in the sector. Over the last three years, Chinese regulators have loosens their oversight leading to an influx of private capital.
DBS Recommended Strategy: Look For Multiple Growth Drivers
For investors who are looking to ride on the M&A fever, DBS recommends looking at two criteria. The first criterion is that companies need to have multiple growth drivers, apart from M&A. The second criterion is that the company needs to have an M&A strategy that does not harm the group’s overall margins and growth in the long-term. Based on these two criteria, here are four Chinese education companies that DBS thinks investors should be looking at as the M&A fever heats up.
Investors Takeaway: 4 Chinese Education Companies To Invest In
- China Education Group Holdings
China Education Group (CEG) is one of DBS’ top pick for the Chinese education sector. DBS expects CEG’s organic revenue growth to accelerate to 10-15 percent in FY18-20 from single digits in previous years. This is largely driven by growth drivers including re-introduction of continuing education programme; more vocational schools without enrolment quota restriction; new campus construction for Baiyun University; 1-to-4 percent year-on-year increase in group average tuition fee level.
Moreover, with two new schools to be consolidated in July 2018, year-on-year earnings growth could be as high as 48 percent for FY18 even with an expected 1-2 percentage point drag in gross margin from the new schools.
BUY, TP HK$16.00
- China Yuhua Education Corp
Two months after acquiring Hunan International Economics University (HIEU), China Yuhua managed to consolidate HIEU into its portfolio, thanks to its strong execution power and management capability. Prior to the acquisition, HIEU had been consistently achieving a net margin of 15 percent. China Yuhua’s acquisition of HIEU will help China Yuhua to raise its net margin to as high as 56 percent in FY18-20. The market is also optimistic on the post-acquisition performance of HIEU.
While it is unlikely that Yuhua will acquire another school as large as HIEU in the next 12 months given its limited cash on hand, DBS believes that Yuhua could go on to acquire some smaller schools, including K12, to achieve its expansion plan.
BUY, TP HK$6.50
- Wisdom Education Int’l Holdings
With visible capacity expansion plans in the pipeline, DBS forecasts Wisdom Education to record strong growth in the coming quarters. According to DBS, Wisdom Education has a capacity expansion plan and land reserve for all its schools (except one). This means that Wisdom Education could add another 26,664-student capacity in the next five years (current: 49,804) without opening any new schools. Furthermore, Wisdom Education is maintaining its plan to open two new schools each year.
DBS also notes that Wisdom Education currently has more than 100 potential targets in its pipeline. It has a cash hoard of Rmb800 million that is ready to be used for expansion. With the target pipeline and financial capability of Wisdome Education, the company will make at least one acquisition in FY19 to drive capacity expansion.
BUY, TP HK$7.20
- China New Higher Education Group
Like many of its peers, China New Higher Education Group (CNHE) recently announced two acquisitions in Xinjiang and Henan to further accelerate the company’s pace of nationwide expansion, especially in less developed regions with high growth potential. At the same time, CNHE has also been maintaining cost control over teachers’ salary and benefits to improve its gross margin by 20 percent. Similar to its peers, M&A activities will continue to be an important theme and share price mover for CNHE.
BUY, TP HK$8.50