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Macquarie Research China Higher Education
30 November 2018 2
Key charts
Fig 1 Private higher-education market size in China
Fig 2 Enrolment rates projected to surge (millions)
Source: Frost&Sullivan, Macquarie Research, November 2018Source: MOE, Macquarie Research, November 2018
Fig 3Per-student gov’t subsidies 2007-16 CAGR
Fig 4 Types of private HEIs in China in 2017
Source: MOE, Macquarie Research, November 2018Source: MOE, Macquarie Research, November 2018
Fig 5 Job placement rates for graduates in 2017
Fig 6 Regional supply/demand mismatch and listed co
primary exposure
Source: MOE, Macquarie Research, Nov. 2018, *Minsheng 2016 dataSource: MOE, Macquarie Research, November 2018
77.982.9
89.195.4
103.7111.5
119.9129.1
139
149.6
6.4%
7.5%7.1%
8.7%
7.5%
7.5%7.7%
7.7%7.6%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%20
40
60
80
100
120
140
160
201320142015201620172018E2019E2020E2021E2022E
Market Size (Rmb b)YoY Growth
37.8
35.3
47.4
30
32
34
36
38
40
42
44
46
48
50
17.7%
19.6%18.6%
16.4%
12.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Primary
School
Middle
School
High SchoolVocational
School
Higher
Education
Private
Undergraduat
e College
21%
Independent
College
(School in
School)
36%
Vocational
College
42%
Internationally
Collaborated
Colleges
1%
93%
95%
89%90%
98%
78%
75%
80%
85%
90%
95%
100%
CEGXinhuaMinsheng*HopeCNHENational
average
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%100000
200000
300000
400000
500000
600000
700000
800000
Higher Edu. EnrolmentHigh School Graduate
Enrolment/Graduate Ratio
Minsheng
Hope
VirscendCEGCNHEXinhua
Macquarie Research China Higher Education
30 November 2018 3
Investment summary
Three factors that determine attractiveness higher education institutions (HEIs)
1. Quality of education
This is assessed on the basis of ranking by third-party agencies and job placement rates of
graduates. Our top picks—Xinhua Education and China Education Group—score well on both
these criteria (Fig 7 and Fig 8).
Fig 7 Third-party rankings for private schools of listed cos
Fig 8 Job placement rates for new graduates in 2017
Source: Wushulian, cuaa, Macquarie Research, November 2018
Source: Company data, Macquarie Research, November 2018. *For
Minsheng, data for 2016 is the latest available.
2. Location – presence in places with wide supply-demand gaps
Regions with large supply-demand mismatches provide a steady organic growth opportunity
for these companies. Provinces like Guangdong, where China Education Group has the largest
exposure, and Anhui where Xinhua has the largest exposure, could potentially support new school
opening, additional enrolment quota for existing schools, and ASP increases. For new school
opening, Minsheng, Xinhua, and Hope all have additional schools in their pipelines. Meanwhile,
regions with large supply-demand gaps are likely to grant higher enrolment quotas for private
schools.
Fig 9 Regional supply-demand mismatches in higher education and listed co exposure
Source: NBS of China, Macquarie Research, November 2018, Data from 2016
93%
95%
89%90%
98%
78%
75%
80%
85%
90%
95%
100%
CEGXinhuaMinsheng*HopeCNHENational
average
0%
50%
100%
150%
200%
250%
300%
350%100000
200000
300000
400000
500000
600000
700000
800000
Be
ijin
g
Sh
an
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ai
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on
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Ch
on
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ing
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im
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ian
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gx
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Ga
ns
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Xiz
an
g
Qi
ng
ha
i
Higher Education EnrolmentHigh School GraduateEnrolment/Graduate Ratio
CEGCNHE
Hope
VirscendMinshengXinhua
Macquarie Research China Higher Education
30 November 2018 4
3) M&A potentials will help under the sector consolidation period.
3. M&A potential adds to attractiveness in a consolidating sector
The higher education sector is highly fragmented, with a large number of potential M&A targets.
Recent changes in policy seem intended to promote sector consolidation by reducing hurdles to
M&A. On this parameter, we believe China Education Group, Xinhua and Minsheng, with low
gearing ratios and substantial amounts of cash raised through public issues—are particularly well-
placed to participate in M&A.
Fig 10Peer comparison
China
Education
China New
Higher
Minsheng
Education
Xinhua
Education
Hope
Education
Virscend
Education
Yuhua
Education
Chunlai
Education
Ticker 839 HK 2001 HK 1569 HK 2779 HK 1765 HK 1565 HK 6169 HK 1969 HK
Market Cap (HK$b) 22.6 6.1 5.9 3.5 8.8 12.2 10.4 1.7
Per student value (HK$ '000) 186.3 155.5 136.1 100.3 119.7 315.2 203.2 37.6
Fiscal YE December December December December December December August August
Grade level Higher
Education
Higher
Education
Higher
Education and
K12
Higher
Education
Higher
Education
K12 and
Higher
Education
K12 and
Higher
Education
Higher
Education
Financials (last FY) FY18* FY17 FY17 FY17 FY17 FY17 FY18 FY17
Revenue (Rmb m) 933414478338752953 1,195461
Gross profit margin (%) 61.0% 54.9% 58.3% 57.0% 47.8% 47.7% 56.1% 63.1%
Operating margin (%) 41.0% 40.0% 30.4% 35.6% 32.2% 38.7% 48.5% 49.0%
Net margin (%) 43.0% 56.3% 54.4% 50.9% 27.9% 33.0% 49.2% 32.9%
Tax rate (%) -3.4% 7% 0.8% 1.2% 9% 2% 0% 0%
Operational data
Reporting period FY18* 1H18 1H18 1H18 1H18 1H18 FY17 FY17
Students enrollment121,315 39,226 43,34434,889 73,512 38,709 51,186 45,210
Number of teachers3589** 1,885 1,639 945 5,535 2,608 2,637 1,718
Student-to-teacher ratio--21263713151926
Annualized average tuition
(Rmb)
7690* 12,687 14,593 11,490 14,365 30,503 16,532 10,194
Balance sheet strength
Reporting period FY18* 1H18 1H18 1H18 1H18 1H18 FY18 1HFY18
Gearing ratio 3.7% 85.9% 1.7% 5.7% 213% 31.2% 13.4% 197%
Cash & equivalent (Rmb m) 1269 569 1316 1120 291 428 1593 182
MQ forecast
Revenue CAGR in 2018-21E 28.9% 41.3% 26.8% 20.5% 20.4% 22.6% -- --
Earnings CAGR in 2018-21E 34.9% 32.3% 12.7% 22.1% 25.6% 21.6% -- --
Enrolment CAGR in 2018-21E 7.8% 17.1% 29.6% 6.4% 14.6% 14.7% -- --
ASP CAGR in 2018-21E 19.6% 20.7% -3.0% 12.4% 5.0% 6.9% -- --
OPM Expansion in 2018-21E626bps -1458bps -992bps 282bps 788bps 72bps-- --
Chairman's other business
Education
only
Education
only
Education
only
Cuisine
Education,
Education
technology
Education
only
Education
only
Education
only
Education
only
Top management holding 75% 49% 75% 71% 62% 42% 66% 75%
Use of VIE structure Yes Yes Partially Yes Yes Yes Yes Yes
Number of provinces 4 7 3 1 3 1 2 1
Source: Company data, Macquarie Research, November 2018. *FY18 only contains 8 months of results, **data from FY2017.
Private higher education companies in China are trading at a PER of 19.3x 2018E