Insights

The Hidden Value in China’s Education Stocks

China’s education sector has exploded over the last few years, but not all stocks are overvalued. In particular, 3 Private School stocks look undervalued and may be an excellent opportunity to buy right now. – Online education stocks China

What’s driving China’s Private School Market?

China’s education sector has exploded over the last few years as parents compete to give their children the best opportunities in life. The relaxing of China’s one-child policy, growing incomes, and the fierce competition for top grades have driven the demand for private schooling.

However, schools take time to build. It can take years to obtain approvals, construct campuses, build student resources, and most importantly, establish a reputable brand. This is how the sector limits new competitors.

However, risks have emerged more recently, as Covid-19 pushed schools to turn to online teaching and added uncertainty to target enrollment numbers for next years. Despite these issues, the industry’s long-term prospects remain promising. There are in particular three stocks in the private education sector that could be good buys right now.

China Maple Leaf Educational Systems Limited (SEHK:1317)

Maple Leaf is China’s largest private international school group offering bilingual education with dual-diplomas, meaning students can get both Canadian and China diplomas. They operate mainly in China, but increasingly internationally.

Maple Leaf’s Price-to-Earnings (PE) is 10.50, Price-to-sales (PS) is 4.12, and Price-to-Book (PB) is 1.57. What stands out here is the low PE and PB, especially when compared to competitors. And though the PS is not cheap, it shows their strong net profit margin of 33.3%. In the latest Half-Year interim report, although remaining profitable, they see this year’s net profits fall 6.1% with no interim dividend, which worried investors.

Despite this, it is important to note that Maple Leaf’s revenues and profits have grown 248% and 309% since 2015. If you worry about Sino-US tensions dampening overseas study demand, you can take comfort that Maple Leaf is diversified with operations in Canada, Australia, and Singapore, but not in the US.

Shanghai Gench Education Group Limited (SEHK:1525)

Shanghai Gench has a university under its name, Shanghai Jian Qiao University in Lingang, Shanghai. Founded in 1999, they offer 54 undergraduate majors and 13 junior college majors.

While Shanghai Gench’s success relies mainly on its only university, its location in Shanghai—China’s richest city, and in Shanghai’s Lingang New City Area—provides the company with new business opportunities.

Trading at 17.52 PE, 4.38 PS, and 2.25 PB , Shanghai Gench’s valuation is not the cheapest. That said, their revenue has grown an average of 14% per annum over the last 4 years and their income has grown 76% in one year. Taking this into account, their higher PE no longer looks so expensive.

Minsheng Education Group Company Limited (SEHK:1569)

Minsheng has under its name seven higher education institutions, two secondary schools, and two high schools, mainly in China’s second-tier cities. Since last October, the group launched Mingshi online and Minsheng online, providing adult education, academic training, vocational and certificate training through the internet.

Their strategy is to grow organically through the expansion of existing campuses and the acquisition of schools in areas with limited higher education options.

With a PE of 11.47, PS of 3.9, and PB of 1.09, they are relatively cheap. However, they have a high debt-equity ratio of 16.82 which may worry some investors.

A key event for the firm was the acquisition of 51% of Leed International Education Group Inc for RMB582.5 million in November 2018, with the sellers having the option to sell the remaining 49% for at least RMB981.5 million within 5 years. This may further add to Minsheng’s debt burden or will lead them to issue new shares.

On the bright side, Leed has expanded Minsheng’s coverage in China and, with its RMB295 million revenue in 2018, will be able to contribute to Minsheng’s future financial performance.

Foolish Conclusion

All 3 stocks seem to be good value with reasonable PEs, good growth, and are competitive in their own way. They will offer a mixture of online and offline teaching in the face of COVID-19. Maple leaf has a particularly attractive valuation, and their relatively weaker 1H20 results are inadequate proof to the worry that the business has turned sour. International schooling will remain an attractive option to parents in China, and Maple Leaf is the market leader in China’s International schooling market.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Robert Chan doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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