To The Moon

The education sector in Hong Kong stocks has soared in recent days: giant leader Wisdom Education$WISDOM EDU INTL(06068)$ jumped 166% in 4 trading days, Scholar Education$SCHOLAR EDU(01769)$ rose 126%, and $KOOLEARN(01797)$ continued to hit a new all-time high.

Recently, the education sector rose as China released the "Outline of Strategic Planning for Expanding Domestic Demand (2022-2035)".

The outline proposes to

actively develop education service consumption, encourage social provision of education services, support and regulate the development of private education, promote the reform of private education classification and management, expand market opening to the education sector, and increase workers' income through vocational education.

Why are education stocks abandoned by capital?

Education stocks were once loved by the capital market. $TAL Education Group(TAL)$ , $New Oriental Education & Technology(EDU)$ , $Gaotu Techedu Inc.(GOTU)$ were all picks of investment institutions.

However, as the burden of education increased, regulators began to restrict extracurricular education. In May 2021, the "Opinions on Further Reducing the Burden of Homework and Off-Campus Training for Students at the Compulsory Education Stage" was approved.

According to the document, out-of-school training institutions for the compulsory education stage were converted to non-profit institutions. Such institutions were no longer eligible to be listed in the capital market.

Subsequently, K12 education stocks shut down their related businesses and their share prices plummeted.

The strategic plan to expand domestic demand proposed to support the development of private education, giving the sector a new opportunity for development.

Of course, K12 education stocks also faces the risk of whether the policy will meet expectations. But aside from K12, vocational education stocks are good targets both fundamentally and policy-wise.

1. Vocational Education Stock - China Education Group $China Edu Group(00839)$

China Education Group, founded in 1989, operates some of the top and most prestigious private higher education institutions.

In FY2022, the company generated RMB3.93 billion in revenue from higher vocational education, accounting for 82.6% of total revenue; RMB 636 million in revenue from secondary vocational education, accounting for 13.4% of total revenue; and the remainder from the international education segment.

Overall, China Education Group's business doesn't focus on K12, which is less affected by policies and perfectly in line with the direction of national policy support.

However, China Education Group is still affected by the K12 education crackdown, and its valuation level has fallen much.

From a price-to-earnings perspective, China Education Group was valued at 40 x before the K12 policy in 2021. Prior to this surge, the P/E ratio was only 7x.

Aside from the lack of capital confidence, China Education Group's fundamentals are very strong.

In FY2022, China Education Group's total revenue reached RMB 4.756 billion, up 29% year-over-year; net profit was 1.845 billion, with a net margin of 38.8%.

The reasons behind the strong fundamentals

1. Growth in the number of college entrance examination participants. 

The number of college entrance examinations in 2021 and 2022 continues to set record highs, reaching 10.78 million and 11.93 million respectively.

2. China Education Group has the right operating strategy.

Through acquisitions and expansions, the company has increased its revenue scale. For example, in September 2021, China Education Group acquired a 51% stake in Jincheng College of Sichuan University for RMB 2.4 billion.

3. The company's endogenous growtho.

The construction of the second phase of the new Zhaoqing campus was completed in FY22 and the company has purchased another 372 acres of land for the third phase. In addition, the company plans to build and renovate a total of approximately 30,000 beds in four schools.

4. China Education Group's international operations are also promising.

The company's Newcastle campus in Australia and the newly acquired Australian Institute of Business see a slight decline in revenue in fiscal 2022 due to enrollment disruptions caused by pandemic prevention and control entry restrictions.

However, after the relaxing of the Australian border, the international education segment rebounded quickly, with revenue increasing by 55.4% YoY.

Relatively high dividend yield

With better growth, the company has a dividend yield of 3.4% (based on current share price). The company's dividend ratios in the past 3 years were 42.84%, 51.86% and 44.4% respectively.

Although the dividend yield is not high for a Hong Kong stock, it is rare that it balances growth. With strong fundamentals, the company's valuation is only low double. Investors who do not want to gamble on K12 can focus on higher education stocks.

2. Focus on the transformation of K12 companies 

Investors can also focus on the transformation of K12 education stocks.

For example, after the transformation of $KOOLEARN(01797)$ to live e-commerce, the GMV of Oriental Selection has repeatedly gone up. According to brokerage projections, the GMV of Oriental Selection will be as high as RMB 9 billion in FY23.

After the successful transition to live streaming, $KOOLEARN(01797)$'s share price has frequently hit new record highs this year.

With $KOOLEARN(01797)$ as a role model, other K12 education stocks are transforming their businesses. For example, $SCHOLAR EDU(01769)$ 's recent surge is due to the fact that it is also betting on a live broadcast, targeting the local life.

Education stocks are about to become the big winners in the Hong Kong stock sector.