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Summary of Bright Scholar Education (BEDU US)

Core Content

Bright Scholar Education (BEDU US) is a leading international and bilingual K-12 education provider in China, recognized as the largest in terms of student enrollment by Frost & Sullivan. The company is expected to deliver a significant earnings turnaround in FY17E, moving from a net loss in FY16 to a net profit of RMB162 million, with a recurring EPS CAGR of 84% from FY17E to FY19E. This growth is attributed to a 38% revenue CAGR and expansion in net profit margins.

Main Competitive Advantages

• Market Leadership: Bright Scholar is the largest international/bilingual K12 school operator in China by student enrollment.
• Premium Pricing: Offers higher tuition fees than both local and international competitors due to its reputation and quality of education.
• Effective Programs: Provides globally-recognized curricula such as IB, A-levels, and AP, and has a strong track record of student placements into top universities.
• Synergies with Country Garden: Collaborates with Country Garden to develop and operate schools, leveraging its real estate and brand to reduce capital expenditure and increase enrollment.

Key Financial Highlights

Investment Thesis

• Earnings Turnaround: Bright Scholar is expected to report a net profit in FY17E, marking a significant improvement from FY16's net loss.
• Growth Drivers: Student enrollment growth (23% CAGR) and tuition fee increases (high single-digit YoY) are key growth drivers.
• Margin Expansion: GPM is expected to improve from 29% in FY16 to 36% in FY19E, driven by a better student-teacher ratio and tuition fee hikes.
• Target Price: The target price is set at US$15.35, based on a 0.9x FY17E target PEG, in line with the average PEG of HK-listed education peers. This translates to a 35x FY18E P/E.

New Education Policy Impact

The new education policy is expected to have a slightly positive impact on earnings, as it reclassifies primary/middle schools into non-profit entities, leading to a lower effective tax rate. The effective tax rate is projected to decrease from 21% in FY17E to 18-19% in FY18E and FY19E.

Key Risks

• Geographical Concentration Risk: Schools are primarily located in Guangdong, which could limit growth potential in other regions.
• Policy Risk: Potential negative surprises from new education regulations.
• Enrollment Risk: Student enrollment may not meet expectations.
• Lease and Renewal Risk: Property defects and lease renewals for Guangdong Country Garden School.

Valuation Comparison

Business Strategies

• Enhance Education Quality: Focus on academic outcomes and tailored teaching methods.
• Expand Geographically: Continue to establish schools in new markets across China.
• Operational Efficiency: Improve utilization rates and reduce costs.
• Strategic Partnerships: Continue to grow through partnerships and selective acquisitions, such as the acquisition of Focus Education.

Shareholding Structure

• Bright Scholar Management: 85%
• Hillhouse Capital: 4%
• Serenity Capital: 3%

Industry Overview

• Private K-12 Education: Expected to grow from RMB217bn in 2016 to RMB370bn in 2021E, with a CAGR of ~11%.
• International Schools: Expected to grow faster, with a CAGR of 19% to reach RMB40bn in 2021E.
• Market Demand: Increasing demand for overseas education and higher penetration rates in private primary/middle/high schools.

Conclusion

Bright Scholar Education (BEDU US) is positioned as a high-growth international school operator in China, with a strong market presence, effective programs, and strategic collaborations. The company is expected to deliver significant financial improvements and growth in the coming years, making it an attractive investment opportunity. However, the company faces key risks related to its geographical concentration, regulatory changes, and enrollment performance. The initiation of a "BUY" rating with a target price of US$15.35 is justified by its premium growth and business model, which is more aligned with HK-listed peers.