Yuhua Education has disclosed additional information about its acquisition of LEI China. As a result,we revise up our profit forecasts for Hunan International Economics University (HIEU), the key assetin Yuhua’s acquisition. We believe HIEU’s operations will have a substantial impact on Yuhua’searnings over the next three years, while being optimistic about Yuhua’s ability to improve HIEU’soperational efficiency. We raise our EPS forecasts from Rmb0.14 to Rmb0.15 in FY18E ( 25% YoY),from Rmb0.18 to Rmb0.20 in FY19E ( 33% YoY), and from Rmb0.23 to Rmb0.25 in FY20E ( 25%YoY). We also lift our target price from HK$5.25 to HK$5.74. With 36.7% upside, we maintain ourBUY recommendation.
乐天堂娱乐网站， Enrolment jump. Thanks to the acquisition, Hunan Lie Ying Mechanic School (HLY School), Hunan LieYing Property Management (HLY Property), and HIEU Vocational Skills Training Centre (HIEUTraining Centre) will increase Yuhua’s student enrolments by 29,000 (representing 54% of Yuhua’sprevious FY18 enrolment estimate of 53,300). Given higher tuition fees for the acquired firm’scollege business (Rmb15k on average vs Rmb12k for Yuhua’s college), we forecast Yuhua’s averagetuition fees to grow 3% YoY in FY18E. We expect the acquisition to increase Yuhua’s revenue by24.5%, compared to our previous revenue forecast for FY18E, assuming the firm consolidates sixmonths of operations for the acquired schools in FY18E.
Optimising operations. We believe Yuhua’s management will improve HIEU’s profitability byincreasing operational efficiency and reducing financial gearing. More specifically, we expect Yuhuato reduce HIEU’s teacher costs and strictly control its operational expenses. We forecast HIEU’sstudent-to-teacher ratio to rise to 31 by FY20E, from the current level of 26, which is significantlylower than Yuhua’s 44 in Zhengzhou Technology and Business University (ZTBU). We highlightYuhua’s plan to strengthen control over subsidiary schools by applying an enterprise resourceplanning (ERP) system. We expect HIEU’s blended gross margin to improve from 26% in FY17 to 30%in FY18E and 44% in FY20E. As part of the acquisition terms, Rmb215m will be used for debtrepayment, which, according to our calculations, will enable annual interest expense to decrease byc.Rmb21.5m. As such, we estimate that interest expense will reach c.Rmb18.5m in FY18E for a totaldebt of c.Rmb185m. Overall, we expect HIEU’s net margin to increase from 14.6% in FY17 to 20.5%in FY18E and 36.9% in FY20E. We forecast Yuhua’s recurring net margin to decline from 51% in FY17to 47% in FY18E, due to HIEU’s lower profitability, before recovering to 49% in FY19E and 55% inFY20E, on the back of HIEU’s improving operational efficiency.
Maintain BUY. We forecast Yuhua’s earnings to grow at a Cagr of 39.4% in FY18-20E, representinga PEG ratio of 0.77x with 25.5x FY18E PE. We expect the acquisition to restore investorconfidence in Yuhua’s growth prospects. We raise our EPS forecasts from Rmb0.14 to Rmb0.15 inFY18E ( 25% YoY), from Rmb0.18 to Rmb0.20 in FY19E ( 33% YoY), and from Rmb0.23 toRmb0.25 in FY20E ( 25% YoY). We also lift our target price from HK$5.25 to HK$5.74,representing 35x FY18E PE. With 36.7% upside, we maintain our BUY recommendation.