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Investor Notes - Phillip Securities (HK) Ltd
Past Investor Notes  
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18 Sep, 2020 (Friday)

            
BJ ENT URBAN(3718)
Analysis¡G
Beijing Enterprises Urban Resources Group (3718) is principally engaged in environmental hygiene services, hazardous waste treatment business and waste electrical and electronic equipment treatment business. As at 30 June 2020, the Group had 107 environmental hygiene services projects, 7 hazardous waste treatment projects in operation and 1 hazardous waste treatment project in trial operation, 2 revenue-generating waste electrical and electronic equipment treatment projects. The Group intends to participate in more tendering process for new projects, expand into new markets and seek the opportunities to expand the services to certain related business areas, such as recycling, sorting, greenway maintenance and reuse of municipal waste as a result of increasing urbanization in China and privatization of environmental hygiene service. (I do not hold the above stock)
Strategy¡G
Buy-in Price: $1.90, Target Price: $2.20, Cut Loss Price: $1.75


E-HOUSE ENT(2048)
Analysis¡G
Tmall, a subsidiary of Alibaba (9988), announced the establishment of a strategic cooperation with E-House (2048) to jointly launch the "Tmall Haofang" platform to help real estate companies customize their online real estate flagship stores. According to reports, Maohaofang will not make money for at least the next 3 years, and 100% of all income will subsidize home buyers. Tmall Haofang will integrate 3D shopping technology, live broadcast and more financial service capabilities with the real estate industry to open up the full link of online house viewing and house purchase. In addition, Tmall and E-House jointly released the "Real Estate Transaction Cooperation Mechanism" (ETC), which will be based on new product upgrades to provide four transaction scenarios for new houses, second-hand houses, special houses and auction houses, and carry multiple services for the online real estate transaction process. Features. The incident is believed to produce good synergies and benefit the company`s long-term development.
Strategy¡G
Buy-in Price: $10.20, Target Price: $12.00, Cut Loss Price: $9.10



China Kepei (1890.HK) - Margin Higher than Expected, Huge Increase in 20/21 Student Enrollment

Investment Summary

1H20 interim result overview

The company's 1H20 revenue was RMB 419 million (+16.7% yoy), GP was RMB 309 million (+22.6% yoy), NP was RMB 321 million (+31% yoy). The NP of Harbin Institute of Petroleum acquired in 1H20 was consolidated in the company's interim report as other income. Hence, the NP of the company was higher than the GP for the interim. If the revenue and cost of Harbin Institute of Petroleum is simulated to be consolidated into the company's interim report, the company's revenue/GP for 1H20 were RMB 478 million/RMB 353 million, with corresponding GPM at 73.8%. This simulated GPM was far higher than our previous expectation, which has fully demonstrated the company's strong post investment management and resource integration abilities. Further, as affected the COVID epidemic, the boarding fee refund of the company's self-built schools/ Harbin Institute of Petroleum were RMB 26 million/ RMB 6.1 million respectively. The 1H20 revenue would be RMB 445 million (+23.8% yoy) if excluding the effect of the boarding fee refund. Although the company saw a huge decrease in boarding fee in 1H20, but it was partly offset by the decrease in administrative expense ratio as the suspension of classes in 1H20 due to COVID. The administrative expense ratio was down by 2.8 ppt yoy.

Enrollment in 20/21 academic year has increased significantly yoy, we are expecting a huge organic growth in future

The number of enrollment for the company's undergraduate program in 20/21 academic year increased by 38% yoy to 11,213, ranking 1st in Guangdong Province. Within it, the number of enrollment for ¡§junior college graduate into undergraduate program¡¨ was 3600, up by 11 times yoy. Since there are still no graduates from ¡§junior college graduate into undergraduate program¡¨ yet, hence, the number of newly admitted students will be the net increase in the number of undergraduate students for 20/21 academic year. Further, the number of enrollment for junior college program in 20/21 academic year is 6572, up by 143% yoy. In terms of Adult college program and secondary vocational education program, the number of enrollment also increased year on year. As for tuition fee, the undergraduate fees of Guangdong Polytechnic College and Harbin Institute of Petroleum in 20/21 academic year will increase by 12% and 10% respectively yoy. The tuition fee of junior college program, Adult college program and secondary vocational education program will also increase by 5%,10% and 10% respectively. On the other hand, the company will expand 52,000 and 60,000 beds for boarding purposes respectively this year and next, laying a solid foundation for future enrollment expansion.

The ¡§change in organizer¡¨ progress for Harbin Institute of Petroleum is going smooth, the company is expected to continue its M&A expansion in future

The NP of Harbin Institute of Petroleum has been consolidated into the company's interim report. The ¡§change in organizer¡¨ progress for Harbin Institute of Petroleum is going smooth, we expect that revenue of Harbin Institute of Petroleum can be consolidated into the company's financial statement by the end of the year. On the other hand, the revenue/ GP for Harbin Institute of Petroleum from March to end of May were RMB 59 million/RMB 43 million, with corresponding GPM at 73.8% (+3.8ppt yoy), fully demonstrated the company's strong post investment management and resource integration abilities. We forecast the 2020E GPM of Harbin Institute of Petroleum would drop to 59% because of the industry seasonality effect, but it is still significantly higher than the GPM of 55% in 2019. At present, the tuition fee of Harbin Institute of Petroleum is lower than the average higher education tuition fee in the province, which doesn`t match with the company's leading employment rate and postgraduate entrance examination rate in the province. We believe the tuition fee of Harbin Institute of Petroleum still have much room to increase in future. Looking forward, the company currently has RMB 860 million in cash, plus the RMB 2.3 billion credit line from Shanghai Pudong Development Bank, the company has sufficient cash to make acquisitions in future. The company is expected to make 1-2 acquisition per year.

The new policies on the education industry mainly affects the Compulsory Education Sector and has tiny effect on Higher Education Sector

During the fifteenth meeting of the Central Committee for Comprehensively Deepening Reform (¤¤¥¡¥þ­±²`¤Æ§ï­²©e­û·|²Ä¤Q¤­¦¸·|ij) on the 1st of September, President Xi Jinping has presided over the guideline of vitalizing higher education in the country's central and western regions¡mÃö©ó·s®É¥N®¶¿³¤¤¦è³¡°ªµ¥±Ð¨|ªº­Y¤z·N¨£¡nand the guideline of standardizing private schools for compulsory education¡mÃö©ó³W½d¥Á¿ì¸q°È±Ð¨|µo®iªº¹ê¬I·N¨£¡n. The guideline of standardizing private schools for compulsory education ¡mÃö©ó³W½d¥Á¿ì¸q°È±Ð¨|µo®iªº¹ê¬I·N¨£¡nis in line with the Implementing Regulations for the Law for Promoting Private Education of the PRC (Revised Draft) (Draft for Review) ¡m¥Á«Pªk¹ê¬I±ø¨Ò¡]­×­q¯ó®×¡^¡]°e¼f½Z¡^¡n issued in 2018. It restated the public welfare attributes of compulsory education (primary and junior high school).Further, the opinions on further strengthening and standardizing the management of education fees ¡mÃö©ó¶i¤@¨B¥[±j©M³W½d±Ð¨|¦¬¶OºÞ²zªº·N¨£¡npublished by Ministry of Education and other four departments at the end of August is also consistent with the Implementing Regulations for the Law for Promoting Private Education of the PRC (Revised Draft) (Draft for Review) ¡m¥Á«Pªk¹ê¬I±ø¨Ò¡]­×­q¯ó®×¡^¡]°e¼f½Z¡^¡n, stating that the individual school fees can only be adjusted by the provincial Government for Non-Profitable Schools and for Profitable-Schools, school fees can be freely adjusted according to the market conditions.

In conclusion, the newly announced policies stated above only affect compulsory education. The guideline of standardizing private schools for compulsory education¡mÃö©ó³W½d¥Á¿ì¸q°È±Ð¨|µo®iªº¹ê¬I·N¨£¡n once again emphasized that compulsory education can only be held on a non-profit basis, which has a negative impact on the future growth of compulsory education schools. In addition, standardizing private schools for compulsory education may potentially increase the capital investments on compulsory schools and hence extending the investment return cycle. However, we believe that for China Kepei, the contents of the above-mentioned new policies are consistent with those from the Implementing Regulations for the Law for Promoting Private Education of the PRC (Revised Draft) (Draft for Review) ¡m¥Á«Pªk¹ê¬I±ø¨Ò¡]­×­q¯ó®×¡^¡]°e¼f½Z¡^¡n. Since the schools of China Kepei will choose to operate as profitable schools and the schools of China Kepei are located in Guangdong and Heilongjiang provinces, where higher education can set prices independently and without the interference of the Government. Hence, future tuition fee increases and M&A of the company will not be limited by these policies.

Valuation

Overall, the company's 1H20 results were generally in line with our previous expectations. Taking into account of the refund of boarding fees during the period, the increase in the company's overall gross profit margin as well as the decrease of the admin expenses ratio in 2020H1, we have raised the 2020/2021 EPS to RMB 0.33/0.39. We raise the TP to HKD 7.67 (+6.5%), which implies 2020/2021 P/E ratio of 21.0x/17.7x. We upgrade the rating to ¡§Buy¡¨.

Risk:

acquisition not as effective as expected, teaching quality diminished, change of related law policies, the number of students increased less than expected

Financials

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Recommendation on 18-9-2020
RecommendationBuy
Price on Recommendation Date$ 6.160
Suggested purchase priceN/A
Target Price$ 7.670
Writer Info
Kevin Chiu
(Research Analyst)
Tel: +852 2277 6514
Email:
kevinchiu@phillip.com.hk

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