It is hard not to have a soft spot for recession proof businesses. Education, for instance, is one of the examples. Because of the importance and how highly regarded education is in our society, it is interesting to look at companies with direct exposure to such industry. While looking across the highly talked about Shanghai-Hong Kong connect. We identified a company that is poised to ride on the macro outlook of the education industry, and the rising income of the middle class in China. China Maple Leaf Educational Systems (CMLES) is the largest international high school operator in China. It is listed on 28th November at HK$2.88, with an initial indicative price range for its initial public offering at HK$2.23 – HK$3.07, with some 334 million shares being offered. There are 5 main investment points that drew our attention to CMLES. 1. Largest Market Share According to Frost & Sullivan (F&S), CMLES as of 2013/2014 commands the largest market share in the international high school market (9 percent), and 7.6 percent market share in the international school market in China. Referencing to the pie charts below, you’d have noticed that CMLES’ market share in both the international high school and international segment morphs that of its closest competitors. This is largely due to its unique offering of dual curriculum and diploma that is highly recognised in China, and internationally. 2. Further Growth Expected In Private and International Education Landscape F&S reported that the PRC international school market registered a compounded annual growth rate (CAGR) of approximately 23 percent over 2009 – 2013, with total revenue growing from RMB8 billion to RMB18.4 billion during the same period. The total number of students enrolled also reflected a CAGR of approximately 18.6 percent from 2009 – 2013 to reach 156,500 students. F&S also quoted the strong intention of Chinese parents to send their children to study abroad. With the rising income levels seen in China’s middle class, and the one child policy which will see a lot more spending by grandparents and parents on that one child, parents are increasingly choosing to send their children to international schools where diplomas earned from such establishments can provide direct routes to ivy league universities in the United states (US), Canada or even the United Kingdom (UK). It is expected that the international school market in China is likely to sustain its double-digit CAGR of 11.8 percent over 2013 – 2017. 3. Unique Curriculum, Recognition Of Diplomas In China and Internationally Due to CMLES’ unique dual – curriculum education offering, students of CMLES will be under a British Columbia (BC) certified education program from Grade 10 (K-10) onwards. Upon graduation, the students will receive dual diplomas which are recognised in China, and also in major universities in countries such as US, UK and Canada. Most Chinese parents these days want to send their children overseas for their universities education, and with the BC accredited program in their diplomas, students of CMLES can now do so. This is endorsed even further with CMLES’ memorandum of understanding with over 50 reputable overseas universities. F&S also noted that CMLES boasts a high transition rate of approximately 50 percent student count admitted into the top 100 universities in the world, which is the highest ratio among the top five international schools in China in the 2012/2013 school year. 4. Room For Higher Tuition Fees, Raising Eventual Profits Decking CMLES’ current tuition fees against its peers, it is evident that CMLES’ fees are the lowest among its international peers. As CMLES’ stand point is to provide affordable quality education, it is largely popular and affordable to the rising middle class in China. In China, tuition fees hike by education providers would require approvals to be given by the authorities prior to the fee hike. In fact, CMLES was given the option to raise its tuition fees in Shanghai to RMB100,000 a year, but at that point, CMLES only adjusted it to around RMB70,000 a year. This clearly shows more room for CMLES to raise tuition fees. Currently, CMLES commands an average good gross profit margin of some 45 percent and average adjusted earnings before interest and tax of some 38.8 percent for FY11 – FY13. Sensitivity analysis shows that (p198) a 3 percent – 6 percent increase to its tuition fees would have resulted in a RMB11.8 million – RMB35.5 million increase in its profit position for FY13. FY13’s profit for the year stood at RMB33.2 million. This represents a potential addition to net profit between 35.5 percent to 106.9 percent. CMLES’ current gearing looks high on the onset at 65.8 percent, primarily due to its small equity base. However, using a net debt approach, CMLES reflects a net cash position for CMLES, primarily due to its sizable cash pile of RMB409.3 million, reflecting some 22.4 percent of total assets. 5. Experienced Board Members, Strong Value Chain Pipeline Two main board members that stuck our attention which we think is of utmost importance to endorsing board value would be Mr Sherman Jen and Mr James William Beeke. Most notably in October 2014, Jen; Co-chief executive officer, chairman, controlling shareholder and founder of CMLES received the Chinese Government Friendship Award from Mr Li Keqiang, PRC’s Premier, and two Vice Premiers. That award was the highest honour awarded by the Chinese Government to foreign experts for their outstanding contributions to the modernised development of China. We see such endorsement a positive catalyst as strong recognition and ties with the government bodies are key essential hooks to secure a good robust standing in the education industry. Mr James Beeke, director, vice president and BC program superintendent of CMLES is key to the overseeing of CMLES’ operation of the BC program in CMLES, which has gotten a lot of recognition for in the international arena. His prior employment experience in BC’s provincial government as deputy inspector, and inspector for BC provincial government’s Ministry of Education is invaluable to knowing how to best structure CMLES’ BC program to bridge a well-recognised affiliation to Canada, and internationally as well. As seen from the diagram below, you would’ve noticed that the fundamental education system in China includes three years of preschool, nine years of compulsory education at elementary and middle school, and three years of high school. CMLES’ strategy of attracting students at an early age has allowed it to retain these students within its education value chain pipeline as these students progress through their education. For school years 2010 – 2013; CMLES has a retention rate of over 70 percent of its students from elementary schools enrolled into their middles schools, and over 70 percent retention rate of students from middle schools enrolled into their high schools. The high retention rates enable CMLES to constantly get recurring revenue from a solid base, without having to spend too much on marketing to recruit students externally. Conclusion Moving forward, the international school market is poised for further growth based on the encouraging education industry outlook, and the willingness of rising middle income class to spend more on quality education. We feel that CMLES’ unique offering and recognition in the international school arena will continue to help sustain its market share. The plans of CMLES to increase utilisation rates from its current schools and raising tuition fees which have been traditionally low are also key points that will see positive impact in its top and bottom line. Also, its plans to expand its school network in China and abroad through forms of cooperation is likely to see it grabbing market share and further morphing its largest peers. CMLES was 195 times oversubscribed and at HK$2.88 a share, this indicates forward PE of some 20.1 times.
Posted on: Fri, 28 Nov 2014 07:46:22 +0000
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