Investor Notes - Phillip Securities (HK) Ltd

29 Apr, 2019 (Monday)

CHINA RES POWER(836)
Analysis：
The group engages in the development, construction and operations of power plants in China, including large-scale efficient coal-fired generation units, wind farms, hydro-electric plants, gas-fired power plants and photovoltaic power projects as well as construction and operation of coal mines. In FY2018, profit attributable to owners (“Net Profit”) amounted to approximately HK$3,950 million, representing a y-o-y decrease of -14.6% (FY2017:HK$4,623); basic eps at HK$0.83, representing a decrease of -14.4% on y-o-y basis (FY2017:$0.97). Since the release of its annual result in 21st March 2019, its` share price had plunged by around 20% from $14.1 to a current price of $11.22, at a 52w low level. Largely attributable to a surprise cut in pay-out ratio from 90% to 40% announced, to make room for deleveraging effort. The stock is currently trading with a yield of 2.93%, higher than peers in the coal fired power domain, with Huaneng Power offering a yield of 2.26% and Huadian Power at 2.20% at the current prices. On a year to date basis, the China Resource Power underperformed its` peers with a dismal performance of -25%. After more than half a month of freefall, China Resource Power is currently trading at a very attractive valuation relative to peers, investors should tune in to a potential rebound in the depressed power producer.
Strategy：
Buy-in Price: $11.00, Target Price: $12.50, Cut Loss Price: $10.75

Komeda Holdings Co., Ltd. ( 3543.JT )　
Founded in 1968. Company expands the coffee shop franchise chain business with brands such as “Komeda's Coffee”, “Okagean” and “Yawaraka Shirocoppe”. With high visit frequency from neighborhood residents who patronize it on daily basis, and the low land rent / rental fees due to their location in the suburbs, along with a no-wastage menu which share the use of common ingredients, the company's strength lies in their ability to generate stable profit from a low operational load. For FY2019/2 results announced on 10/4, sales revenue increased by 16.7% to 30.335 billion yen compared to the previous term, operating income increased by 5.0% to 7.568 billion yen, and net income increased by 3.9% to 5.096 billion yen. There has been a net increase in the number of outlets with 55 outlets throughout the whole business category. Company is also focusing on enhancing profitability in existing outlets, such as carrying out their first joint development of collaborative products between Komeda's Coffee and other companies. For its FY2020/2 full year plan, sales revenue is expected to increase by 8.2% to 32.833 billion yen compared to the previous year, operating income to increase by 4.0% to 7.869 billion yen and net income to increase by 3.8% to 5.313 billion yen. In the Chukyo metropolitan area, company has switched to batch procurement and delivery at their HQ for ingredients used for Komeda's Coffee. In addition, with the new construction of a coffee factory in Kanto, the company has secured the ability to supply to as much as 1,200 outlets. Recommend to buy at ¥2090, target price ¥2142, cut loss if drop below ¥1992.

China Maple Leaf Education Limited (1317.HK) - Satisfactory growth on student enrollment, but still with policy risks

Investment Summary

China Maple Leaf Education Systems Limited is a leading international school operator, from preschool to grade 12 education (K-12) in China. Although the valuation lifted recently thanks to the rumor of a looser regulation on “Education Promotion Law”, we believe that even if there are any difference in regulations compared with "Draft for deliberation ", the main content will not change much. Therefore, the business risk on compulsory education and kindergarten are still very high. As a result, we downgrade the rating from “Neutral” to “Reduce”, with a TP of HK$ 3.78, 10.8% potential downside. (Closing price at 25 April 2019)

Business Update

The group announced that as of March 31, 2019, the number of students enrollment was 41,380, an increase of 38.0% over the same period last year and an increase of 13.2% from October 15, 2018. During the period, the Group acquired a 66% equity interest in a primary and secondary school in Luzhou, Sichuan Province on December 10, 2018 at a consideration of RMB 185 million. The consideration will be paid in cash and allotment and issuance of new shares of the Group to the Vendor. Subsequently, on December 27, 2018, the Group increased its shareholding of 9% by RMB 25.2 million, which lifted the total equity interest held by the company to 75%. The school enrollment was about 3,200 and the school can accommodate a total of 3,500 students. The annual tuition fee ranges from RMB 20,000 to RMB 25,000. In 2018, 4 out of 5 highest scoring students of Luzhou municipal middle school exam were from this school, implying the quality of school education.

Policy risks

It is reported that “Education Promotion Law” will be legislated this year. We believe that even if there are any difference in regulations compared with "Draft for deliberation ", the main content will not change much. For example, there will a non-profit and For-profit classification for private schools, non-profit schools will receive the same benefits as public schools, compulsory education does not allow to choose for-profit and private education should be a supplement to public education.

From a practical point of view, if the non-profit and for-profit classification needs to be implemented literally, the first thing the government needs to resolve is the problem that the compulsory education school will be profitable in the name of non-profit. If the compulsory education school still allows to make use of the legal loopholes to distribute dividends to shareholders, and at the same time continue to enjoy the benefits as a non-profit school, higher education schools may adopt the same method to its maintain non-profit status and will have lower incentives to shift to for-profit status, making the classification failed to perform.

In addition, if there are still legal loopholes in the industry that allow schools to make profits in the name of non-profits, it will certainly lead to a unfair competition to higher education schools that have been shifted into for-profits, and they may therefore protest.

Therefore, we see that the probability of the policy to be implemented literally is very high, business risks on the compulsory education and kindergarten of the Group shall be very large, and even need to spin off to the corporate structure.

Valuation

Although the valuation lifted recently thanks to the rumor of a looser regulation on “Education Promotion Law”, we believe that even if there are any difference in regulations compared with "Draft for deliberation ", the main content will not change much. Therefore, the business risk on compulsory education and kindergarten are still very high. It is very likely that the business will not be able to pay dividends to shareholders in the future. However, since it is generally believed that there will be five-year grace period, we assume that compulsory education and kindergarten business spin off five year later. We maintain 4x P/E ratio for the business to reflect its value before divestiture.

Owing to the satisfactory growth in school enrollment, we increased the CAGR on adjusted net profit in 2019-21F to 19%, with 0.9x PEG, reflecting the increase in the effective tax rate and the payment of land transfer fees after the high school segment turning into for-profit.

We derive a TP of HK$3.78, 11.8% higher than the previous TP to reflect the satisfactory growth in school enrollment. However, as the stock price goes up recently, we downgraded the rating from “Neutral” to “Reduce”, with a potential downside of 10.8%. (CNY/HKD = 0.8656)

Risk

1. VIE structure prohibited in China

2. The grace period of policies is shorter than expected

3. New acquired schools were not able to add value

Financials

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Recommendation on 29-4-2019
Recommendation	Reduce
Price on Recommendation Date	$ 4.240
Suggested purchase price	N/A
Target Price	$ 3.780

Writer Info

Terry Li
(Research Analyst)

Tel: +852 2277 6527

Email:
terryli@phillip.com.hk

Enquiry : 2277 6666 OR investornotes@phillip.com.hk
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