China New Higher Education Thrives on Strong Record, Government Support

Vocational educator placed 98% of its graduates last year, giving it leverage to raise tuitions that powered a 31% revenue jump in its latest financial report

Key Takeaways:

  • China New Higher Education placed 98% of its graduates last year, much higher than the industry average, allowing it to raise tuitions
  • Company should benefit from a slew of government policies supporting the sector, including continued involvement by private players

By Fai Pui

It’s graduation season again, which means a record 10 million students will be hitting the Chinese workforce this year, according to the Education Ministry. Many of those may find challenges ahead as China’s economy sputters under pandemic lockdowns, and internet companies that once soaked up new workers like sponges slash their payrolls instead.

But such a downbeat climate isn’t causing concerns for the likes of China New Higher Education Group Co. Ltd. (2001.HK), a vocational education provider whose subjects may be less sexy than those offered by traditional universities, but which has much better success placing its students.

Despite the economic headwinds, the company boasted an impressive 98% employment rate for its graduates by the end of last year, and an equally impressive 76% increase in the number of graduates hired by leading Chinese companies. More than 10,000 of its students have interned at major domestic and global names like Huawei, JD.com (JD.US; 9618.HK) and Tesla (TSLA.US).

China’s private education sector has taken a major beating lately after Beijing rolled out sweeping changes last year to reduce the burden of homework and after-school classes on K-12 students. But vocational education was not only spared from that, but has actually been the recipient of strong government support.

China New Higher Education’s interim financials showed its revenue grew 30.7% to 1.21 billion yuan ($201 million) in the six months through February, while its profit rose 17.2% to 345 million yuan – even as most of its K-12 peers were awash in a sea of red ink.

Rising tuition revenue

The company attributed much of its recent success to steady gains in tuition revenue and earnings from its lodging and boarding services, as well as the incorporation of income from its branches in Gansu and Zhejiang provinces into its financial statements. During the period, its tuition revenue increased 32% to 926 million yuan.

The company launched eight new majors last year, including ones closely following current science and technology trends such as smart manufacturing engineering, big-data technology, internet and new media. Meanwhile, it has also entered fields in need of specialists to deliver basic public services, such as community rehabilitation, childcare services and early education.

The company also enjoys an edge through its wide array of partnerships with many leading higher education institutions at home and abroad. It is working with the Snow Lab at Harvard’s School of Education on the field of early education. And it has a wide-ranging consultation arrangement with Xi’an Jiaotong-Liverpool University to improve its education standards. Its 98% employment rate owes largely to its partnerships with 1,754 domestic and foreign businesses, including Tencent (0700.HK), Tesla and China Mobile (0941.HK).

Investors are extremely bearish right now on Chinese education stocks, many of which are down 90% or more over the last year. China New Higher Education got caught up in the selloff, losing more than half its value in the last year. Its shares rose 2.1% to close at HK$2.41 on Monday, following the release of its results late the previous Friday. Still, they are down 63% from their 52-week high.

Government support

Despite broader wariness about the education sector, investors should note that China New Higher Education is in a strong position to benefit from government support. Such support is key to doing successful business in China, lowering regulatory risk and often bringing preferential treatment to companies from those sectors.

Last October Beijing released a document on the promotion of high-quality modern vocational education, encouraging listed and leading companies to provide such services. Two months later, the State Council published another document on the subject of vocational educators granting bachelor degrees, again highlighting the sector’s importance. And in January, the government unveiled a program specifically targeting vocational skills training during the country’s current Five-Year Plan that runs from 2021 to 2025.

When the Education Ministry announced in February that promoting vocational education would be a key focus, it underscored its support for non-state-owned actors in the field. And last but certainly not least, revisions set to take effect next month to China’s Vocational Education Law first implemented in 1996 place equal importance on vocational and traditional education, and encourage involvement by the private sector.

“Domestic policies are currently on the side of vocational education service providers. The growing popularity of vocational education in China, coupled with the high employment rates for graduates and good student internships, are giving companies more leverage to raise tuition,” said Ivan Chow, an independent stock commentator who has been tracking the education sector.

Chow also believes that the current policy environment favors vocational education stocks, citing a government program for vocational skills training in the current Five-Year Plan that proposes several concrete goals. Those include providing subsidized vocational skills training to no fewer than 75 million people, granting vocational qualifications or accreditation certificates to no fewer than 40 million people and building no fewer than 200 public vocational training bases.

Growth through M&A

In addition to raising tuitions, China New Higher Education has also grown through M&A. It purchased Beijing Lianhe for 2.35 million yuan early last year to expand its offerings in online education, and bought schools in the city of Zhengzhou and in Gansu province last April, followed by the acquisition of shares in schools in Guangxi and Northeast China. That buying spree boosted the company’s revenue, but its operational costs also jumped by 44.2% last year to 620 million yuan. More worryingly, its gross margin fell by 5.2 percentage points to 40.2%.

The company has paid more dividends in recent years, and also bought back shares between last December and this February. Those factors, combined with its strong position to benefit from future policies, make Chow optimistic about the company’ s prospects. But he has also alerted investors to the pandemic’s possible impact on its tuition revenue, and suggested the company might experience financial pressure after its cash and cash equivalents fell by nearly 30% to 578 million yuan – a figure that is lower than its operational costs last year.

Similar profits in the company’s second half of its fiscal year would give China New Higher Education a lowly price-to-earnings (P/E) ratio of just 4.55 times, below China Education Group Holdings (0839.HK), Edvantage Education (0382.hk) and China Yuhua Education (6169.HK), whose ratios range from 7.2 times to 17.9 times.

Morgan Stanley is positive about the broader sector, and has placed China New Higher Education high on its list of companies to watch, raising its rating from “equal weight” to “overweight.” It has a HK$3.20 price target, implying 33% upside to its current price, which would put the company more in line with its peers in valuation terms.

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