Meeting takeaways: China Education Group POA

Management presentation 

Strong student enrollment growth:

  • 16% organic growth in student enrollment in FY21 
  • 36,000 new capacity added in Sep 2021. Currently four schools in GBA with c.70,000 total enrollment. Expect total student number in GBA to exceed 100,000 in the next two years 

Post-acquisition management track:

  • Hainan Schools contributed Rmb 650m of total revenue and Rmb 140m of adjusted net profit in FY21 
  • Sichuan Jincheng College, which is acquired in FY21, has a total enrollment of 27,000. Enrollment quota this year has increased from 6,500 to 8,100. Current tuition for undergraduate program is Rmb 17,000-20,000 per year and CEG plans to increase it to more than Rmb 21,500 in 2023. Expect Jincheng College to have Rmb 540m of total revenue and Rmb 310m of adjusted net profit (100% equity) in FY22. 

Guidance and outlook:

  • Expect 15% y-o-y organic top-line growth in FY22, among which 10% would be from student enrollment growth and 5% from tuition increase
  • Expect adjusted net profit to shareholders to be Rmb 1.8bn in FY22, up from c.Rmb 1.55bn in FY21. 
  • Capex: the Phase II and Phase III campus construction in GBA would cost c.Rmb 1.5-2bn in total with a construction timeline of 3-6 years. Capex each year would be Rmb 300-600m, plus some maintenance capex. 
  • M&A: Keep the pace of 2-3 deals per year. The acquisition valuation now is stable at 10-14x EV/EBITDA.

Top 3 questions 

  1. What’s your future plans on vocational education with government’s supportive plans? 
  • Secondary vocational education: Expect more student sources and higher tuition. 
  • Applied undergraduate program vs Vocational undergraduate program: Vocational program is more “skill-oriented”. The government encourages applied undergraduate program to do more vocational education. The courses are more or less the same and there would be no additional costs in hardware and software for turning to vocational program, just need more practices in skill training.  
  1. What’s the policy progress on registration for “for-profit” type of schools and what’s the potential impact? Would government recognize the net margin as “too high” for higher education companies?
  • Progress: CEG has schools in 8 provinces in China. Among the 8 provinces, Jiangxi, Shandong and Sichuan has relatively faster progress. Jiangxi School has received the details from local government in Oct and is preparing the paperwork, expects to complete the progress by 31 Aug 2022. Sichuan school has already submitted the paperwork and expects the complete the progress in 2022. Shandong school expects to complete by 31 Jul 2022. There’s no details and deadlines in Guangdong, but Guangdong has mentioned this in 14th FYP and expect to complete by the end of 2022. 
  • Impact: 1) Tax: not yet a tax plan from national level. CEG’s WOFE structure enjoys a tax discount till 2030 (could be extended). Also there’s some tax returns and subsidies. Expect effective tax rate to be c.10%. 2) Land premium: CEG has 3,000mu land that is subjected to payment of land premium if turning to for-profit type. The total amount is estimated to be c.Rmb 200m, and be paid in 3-8 years. It could be amortized in 50 years and the impact on net profit would be 3-4m per year. 3) Tuition: some provinces still have restrictions on higher education tuition now. There would be no such restrictions if choosing for-profit type.
  • CEG believes that current profitability and return is at a reasonable level. The higher education and vocational education enjoys tax discount, meaning that government taking an encouraging attitude. 
  1. Employment rate of students and turnover rate of teachers? 

Students begin internship in Year 3. The schools would train students together with enterprises in Year 4. Most of students could find jobs in Year 4. 

Teachers have base rate on their class hours. Bonus is related to teaching quality and research efforts. The turnover rate of teachers is 6-7% per year which the company believes is at a healthy level.