Yuhua Education plots latest school IPO

The Henan-based private school operator plans to list in Hong Kong, following Wisdom Education’s debut late last month.

Private school operator China Yuhua Education started premarketing an initial public offering on Monday, potentially adding another name to the burgeoning sector in Hong Kong’s stock market.

Henan-based Yuhua will become the fourth Chinese school operator listed in Hong Kong, providing investors yet another choice in a sector often seen as a proxy for investing in China’s emerging middle class.

China’s education sector has become well-regarded among Hong Kong investors since China Maple Leaf Education listed its shares in November 2014. The shares of Maple Leaf and its listed peer Virscend Education have risen 67% and 95% respectively since their IPOs, while Wisdom Education has surged 5.3% in five trading days since listing in late January.

It is not hard to point to the reasons behind the sector’s growing appeal from a macro perspective. Perhaps most obviously, the education sector is a direct beneficiary of Beijing’s abolishment of the decades-old one child policy in late 2015. The policy shift has increased the potential number of students in absolute terms, since the overall birth rate is expected to surge drastically at least in the next few years.

At the same time, private education has also become increasingly affordable as China’s middle class grows, increasing the likelihood of well-heeled parents sending their children to private schools. The large Chinese population also offers school operators more than enough room to expand beyond their home cities and regions.

That does not mean there are no hurdles. Private school operators are facing imminent policy risk from Beijing’s new education law, enacted late last year. According to the law, profit-making private schools will be excluded from China’s nine-year free education programme, suggesting that they could be banned from providing primary to junior secondary education.

But analysts said that, while details of the policy are yet to be unveiled, it is not easy to fully ban private school operators since many of them partner with local governments. In fact, nearly all private school operators are registered as non-profit entities, but some of them avoid reporting their profits through setting up various business models and structures.

Liquidity is another problem for the burgeoning education sector because all listed firms are currently valued under $1 billion, making them less likely to attract large-cap stock investors. At the moment there is no national-level private school operator in China, and most of them operate at most at the provincial level.

Yuhua is one example. Although it only runs schools in the central Henan province, Yuhua claims it is China’s largest provider of private education from kindergarten to university by student enrolments in the 2015/16 school year.

In the 2015/16 school year, Yuhua had 48,220 students compared to Maple Leaf Education’s 20,500 and Wisdom Education’s 30,000 students. As of the end of May last year, Yuhua operated 16 Grade One-to-12 schools, eight kindergartens and the Zhengzhou Technology and Business University.

Yuhua is closer to Maple Leaf in terms of profitability and scale. For the nine months through May last year, Yuhua reported a net profit margin of 38% versus Maple Leaf’s 36.6%, while its nine-month profit of Rmb223 million ($32.5 million) was also similar to Maple Leaf’s Rmb304 million for the entire 2016 financial year.

By comparison, Wisdom Education reported weaker nine-month profit of Rmb118 million and its profit margin was also thinner at 22%.

Syndicate analysts have given Yuhua a fair value range of $1.23 billion to $1.4 billion, which represents 19.9 to 22.6 times its estimated earnings by the end of this year. This appears to be broadly in line with Maple Leaf’s 21.5 times price-to-earnings on a rolling-twelve month basis.

Bankers familiar with the situation said Yuhua’s management roadshow is tentatively slated for mid-February and the listing is set for late February.

Citic CLSA is the sole sponsor of Yuhua Education’s IPO.

¬ Haymarket Media Limited. All rights reserved.
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