IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Hope Education Group Co Ltd / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/27321" target="_blank" data-smartkarma-citation="entities:27321:1">Hope Education Group Co Ltd (1765 HK)</a> is the second largest private higher education player in China based on student enrolment numbers in 2017. At the mid-point of the IPO price range, HK$1.52-1.92 per share, Hope Education will raise net proceeds of HK$2.7 billion, resulting in a market cap of HK$11.5 billion ($1.5 billion). Cornerstone investor, Value Partners, will buy around 15% of the offer shares at the IPO mid-point.</p><p>Our overall view is that Hope Education’s fundamentals are a mixed bag because of:</p><ol>
<li>The primary growth driver for Chinese higher education companies is to increase student enrolments organically and through acquisitions. As measured by total capex, Hope Education has the most ambitious organic growth plans in comparison to its peers. Hope Education plans to expand four of its existing schools (RMB0.8 billion capex) and establish a new school (RMB1.2 billion capex). Unacceptably, Hope Education provides no information on final capacity and payback periods for the expansion of its existing schools.</li>
<li>To date, Hope Education has acquired five schools and established a strong track record of growing the acquired schools. However, since 2016, Hope Education ranked second last in comparison to listed peers as measured by student enrolments brought through acquisitions of schools. Perhaps, the situation will change as a portion of the net proceeds from the IPO has been earmarked for acquisitions.</li>
<li>Hope Education will lag behind <a href="https://www.smartkarma.com/entities/23626" target="_blank" data-smartkarma-citation="entities:23626:1">China New Higher Education Group (2001 HK)</a> /CNHEG and <a href="https://www.smartkarma.com/entities/18218" target="_blank" data-smartkarma-citation="entities:18218:1">China Education Group Holdings (839 HK)</a> /CEG regarding student enrolment growth primarily due to a lower number of school acquisitions. Consequently, based on our forecasts, Hope Education’s revenue CAGR between 2017 and 2019 will lag CNHEG and CEG.</li>
<li>The gross margin of 48% in 2017 is materially below listed peers. The low gross margin is due to the payment of management fees, which are annual fees paid to universities with which Hope Education entered into co-operation agreements. The annual fee is based on a percentage of tuition fees and varies from 15% to 30%. Notably, excluding the management fees, Hope Education’s gross margin was ahead of its listed peers.</li>
<li>Troubling, Hope Education’s related party PPE capex accounts for around 70% of group capex. A single company, Wuyang Construction, accounts for 79% of the related party PPE capex in 2017 and is majority owned by the CEO’s brother. Such sizable related party transactions are not befitting of blue-chip education companies.</li>
</ol><p>Based on our estimates and at the IPO mid-price, Hope Education trades at a marginal premium to the Chinese higher education companies on a 2019 P/E basis. Among listed peers, CEG deservedly trades at a premium due to its better visibility on student enrolment growth and high liquidity. Notably, Hope Education's 2019 P/E of 20x is lower than CEG (27x). We believe that this discount adequately reflects Hope Education's lower forecasted revenue growth and gross margin vs CEG. </p><div class="content-highlight"><p>Our overall view is that Hope Education's fundamentals are a mixed bag as its strong market position and solid acquisition track record is offset by low gross margins and troubling related party transactions. However, the implied 2019 P/E rating at the IPO mid-point adequately accounts for the mixed fundamentals. Consequently, we would participate in the IPO up to the mid-point of the pricing range.</p></div>

Hope Education Group Co Ltd (1765 HK) is the second largest private higher education player in China based on student enrolment numbers in 2017. At the mid-point of the IPO price range, HK$1.52-1.92 per share, Hope Education will raise net proceeds of HK$2.7 billion, resulting in a market cap of HK$11.5 billion ($1.5 billion). Cornerstone investor, Value Partners, will buy around 15% of the offer shares at the IPO mid-point.Our overall view is that Hope Education’s fundamentals are a mixed bag because of:
The primary growth driver for Chinese higher education companies is to increase student enrolments organically and through acquisitions. As measured by total capex, Hope Education has the most ambitious organic growth plans in comparison to its peers. Hope Education plans to expand four of its existing schools (RMB0.8 billion capex) and establish a new school (RMB1.2 billion capex). Unacceptably, Hope Education provides no information on final capacity and payback periods for the expansion of its existing schools.
To date, Hope Education has acquired five schools and established a strong track record of growing the acquired schools. However, since 2016, Hope Education ranked second last in comparison to listed peers as measured by student enrolments brought through acquisitions of schools. Perhaps, the situation will change as a portion of the net proceeds from the IPO has been earmarked for acquisitions.
Hope Education will lag behind China New Higher Education Group (2001 HK) /CNHEG and China Education Group Holdings (839 HK) /CEG regarding student enrolment growth primarily due to a lower number of school acquisitions. Consequently, based on our forecasts, Hope Education’s revenue CAGR between 2017 and 2019 will lag CNHEG and CEG.
The gross margin of 48% in 2017 is materially below listed peers. The low gross margin is due to the payment of management fees, which are annual fees paid to universities with which Hope Education entered into co-operation agreements. The annual fee is based on a percentage of tuition fees and varies from 15% to 30%. Notably, excluding the management fees, Hope Education’s gross margin was ahead of its listed peers.
Troubling, Hope Education’s related party PPE capex accounts for around 70% of group capex. A single company, Wuyang Construction, accounts for 79% of the related party PPE capex in 2017 and is majority owned by the CEO’s brother. Such sizable related party transactions are not befitting of blue-chip education companies.
Based on our estimates and at the IPO mid-price, Hope Education trades at a marginal premium to the Chinese higher education companies on a 2019 P/E basis. Among listed peers, CEG deservedly trades at a premium due to its better visibility on student enrolment growth and high liquidity. Notably, Hope Education's 2019 P/E of 20x is lower than CEG (27x). We believe that this discount adequately reflects Hope Education's lower forecasted revenue growth and gross margin vs CEG. Our overall view is that Hope Education's fundamentals are a mixed bag as its strong market position and solid acquisition track record is offset by low gross margins and troubling related party transactions. However, the implied 2019 P/E rating at the IPO mid-point adequately accounts for the mixed fundamentals. Consequently, we would participate in the IPO up to the mid-point of the pricing range.

Hope Education IPO Preview: Rating Provides Some Hope

Hong Kong

Hope Education Group Co, Ltd. offers educational services. The Company provides educational training, knowledge point sharing, activities arrangement, and other services. Hope Education Group offers its services throughout China.

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Hope Education IPO Preview: Rating Provides Some Hope

Hope Education Group Co Ltd (1765 HK) is the second largest private higher education player in China based on student enrolment numbers in 2017. At...

Arun George