China Education Group Makes The Grade With Rising Profits

Key Takeaways:

• China Education Group has slowed its school purchases over the past two years, but spent a hefty 2 billion yuan on campus construction projects in the last six months
• The company’s financial situation is solid, with a cash reserve of 4.53 billion yuan and an interest-bearing debt ratio of 24.7%

By Molly Wen

China’s leading private provider of higher education has achieved positive marks for its latest financial report card.

Buoyed by resilient demand for vocational training, China Education Group Holdings Ltd. CEGHF turned in an 18% jump in revenue and a nearly 10% rise in net profit when it released half-year results last week, sending its Hong Kong stock price on a three-day winning streak.

The private education sector has struggled through a turbulent few years after a regulatory crackdown on after-school coaching in 2021. But businesses that focus on teaching college-level students or offering professional development have been viewed as safer investment bets, as they can charge high tuition fees over an extended period with relatively low sales costs.

The Chinese authorities have also been supportive of adult education. But as the economy slows, competition has heated up and some private education groups are groaning under heavy debts after acquisition sprees.

China Education Group is the acknowledged industry leader, withthe highest market cap among private higher education firms listed in Hong Kong and boasting the biggest number of schools. Its half-year results for the period ending Feb. 29 found favor with investors and analysts, coinciding with a generally bullish mood on the Hong Kong stock market and a Hang Seng rally.

During the six months, the group’s revenue rose 18.3% from the same period a year earlier to 3.28 billion yuan ($455 million), while net profit increased 9.6% to 1.07 billion yuan, returning to a rising trajectory.

China Education Group’s stock rose 11.5% over three days after the earnings, as the company managed to reverse a decline in net profit. The figures were also well received by market watchers, including analysts from CICC, West China Securities and Soochow Securities.

CICC noted in its research report that the company had demonstrated stable growth with robust internal drivers, as enrollment of new full-time students rose 8.5% to 271,000 thanks to increased capacity, improved teaching quality and integrated workplace training.

The business growth was firmly rooted in China. Domestic revenue from from higher and secondary vocational education rose 19.2% to 2.67 billion yuan, driven by rising student numbers and increased average income per learner. By contrast, the overseas business performed poorly, with revenue falling 1.86% from the same period a year earlier to just 105 million yuan.

For private higher education groups, the size of the student base and the average income per learner are the two key factors for revenue. Companies seeking to boost their profile and accelerate their expansion often look to buy established schools as off-the-shelf investments.

China Education Group operated just three institutions when it listed on the Hong Kong Stock Exchange in December 2017. The group has since scaled up, acquiring at least 11 schools between 2017 and 2021 with the help of multiple fundraising rounds. Its network now includes eight higher vocational schools and four secondary vocational schools in China, plus higher education institutes in Australia and the United Kingdom.

The education provider has slowed its acquisition pace over the past two years, instead investing heavily in building new campuses. According to its latest financial results, capex spending rose 66.6% to 2.03 billion yuan in the period due to construction projects at existing schools and new campuses in Shandong and Guangdong provinces.

In Shandong, Yantai Institute of Science and Technology is building a new campus with a planned footprint of nearly 500,000 square meters that is due to open in the 2024/25 academic year. In Guangdong, Guangzhou College of Applied Science and Technology in Zhaoqing has completed two phases of a new campus. The third phase is under construction on a newly purchased plot of around 250,000 square meters.

According to Soochow Securities, the company will be able to add another 52,000 students after the new campuses are completed. Schools in Zhaoqing City and Yantai City are expected to host new intakes of 12,800 and 8,154 learners in the 2024/25 academic year, with the student body likely to grow further as new campus capacity is brought into service.

Stronger Financial Position Than Peers

Investors have been on edge about debt problems in the private education arena. The vocational training group XJ International Holdings (1765.HK) recently defaulted on $324 million worth of zero-coupon convertible bonds, prompting creditors to file a wind-up petition on March 27. A thicket of legal procedures must be gone through before the Hong Kong court issues its ruling, but the case has soured market sentiment on the sector.  Shares in China Education Group and Minsheng Education Group (1569.HK) went into a downward spiral in late March.

China Education Group is in a relatively healthy financial position. At the end of February, it was sitting on a cash reserve of 4.53 billion yuan. Loans and bond issuance added up to 8.93 billion yuan, including about 1.5 billion yuan in short-term liabilities and 7.43 billion yuan in long-term liabilities. Moreover, before March 28 the company bought back all its convertible bonds due to mature this year, totaling HK $2.36 billion. Its interest-bearing liabilities make up 24.7% of total liabilities.

However, higher investments in teachers and educational facilities have pushed up depreciation costs and eroded margins. The company’s gross margin fell 1.4 percentage points to 56% in the first half from the same period a year earlier. China Education Group now trades at about 8 times earnings, slightly higher than Minsheng Education’s price-to-earnings (P/E) ratio of 7 times and outperforming the sector average.

Although its cash situation is stable, the company faces challenges in the future. China’s population is set to shrink, and more college students could struggle to find work, sowing doubt about the value of higher education. With competition among education providers likely to intensify, private colleges charging high fees could he hit hard. Investors will be keen to see whether China Education Group, by virtue of its scale, can pass that test.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.