China New Higher Education (CNHE) has formally launched Hong Kong's sixth initial public offering from the mainland's private education sector, with hopes of raising proceeds of up to HK$1.059 billion ($137 million) after the greenshoe.
Six is considered a lucky number in Mandarin and the Yunnan and Guizhou-based group looks set to benefit from the groundwork laid by its five predecessors as growing investor awareness pushes valuations higher in the sector.
So far this year, there have already been three IPO's by Chinese private education groups, making them the most active listing category by sector type.
The trio have also bucked the increasingly unfortunate tendency for Hong Kong IPO's to trade down in the immediate aftermarket thanks to non-market valuations underpinned by huge cornerstone tranches. By contrast, Wisdom Education, Yuhua Education and Minsheng Education have respectively risen 22.3%, 24.3% and 4.3% from their listing dates in January, February and March through to Friday's close.
In the primary market, each deal has priced a little higher through its indicative range. This has progressively pushed valuations from the low- to mid-teens on a forward earnings basis.
Wisdom, for example, priced at the bottom of its range at HK$1.70 per share, while Yuhua priced just off the bottom at HK$2.05 per share and Minsheng came mid-way through the range at HK$1.38 per share.
In each case, Hong Kong retail interest was extremely muted, with books closing two times covered for Minsheng and 1.5 times covered for both Wisdom and Yuhua. Specialists said it will be interesting to see if recent secondary market outperformance tweaks retail interest in CNHE, which has a 10% retail allocation pre clawbacks.
Books covered
The institutional order book for CNHE’s 286.22 million primary share deal was already covered by anchor demand before the launch, according to observers who said the company decided to ditch its planned cornerstone tranche in order to give the freefloat more liquidity.
Key will be whether it is also able to maintain some pricing discipline and leave secondary market performance on the table if institutional demand gathers momentum before the books close on April 10.
The deal is being marketed at between HK$2.56 and HK$3.22 per share, which equates to a consensus 2017 forecast price to earnings range of 13.5 to 16.9 times on a pre-shoe basis.
The company is offering 20% of its enlarged on a pre-shoe basis, equating to a market capitalisation of between $470 million and $593 million.
Post-deal, the controlling shareholder, Li Xaoxuan and his associates, will hold a 55.3% stake, while pre-IPO investors Ping An Insurance and CCB will own 12.42% and 7.3% respectively. Minority investors will hold the remaining 5%.
Valuation
Based on Friday's close Wisdom Education was trading at roughly 15.4 times 2017 forecast earnings, while Yuhua Education was at 16.88 times and Minsheng around 14.88 times. China Maple Leaf Education, which listed in November 2014, has a higher valuation still at 18.9 times.
Of the four, Minsheng is considered the closest comparable because it also only operates in the higher education sector. Syndicate analysts believe CNHE should trade through Minsheng on a fair value basis, which points to secondary market upside if the deal prices below the mid-point of the range and markets remain flat over the coming week.
Recent secondary market performance suggests the sector came under profit-taking two weeks ago before staging a recovery last week and particularly Friday when Wisdom rose 2.46% on the day and Yuhua 2.82% compared to a 0.79% fall by the Hang Seng China Enterprises Index.
“Investors really seem to be getting to grips with this sector now,” one specialist argued. “They’ve digested the regulatory changes, announced last autumn and as each new company comes to market it provides additional benchmarks for the whole sector.”
One factor in CNHE’s favour is the fact it does not operate in the compulsory education sector, known as K12, which covers grades one to nine. While private sector education is growing across the board, as a growing middle class seek to escape the rigid state curriculum, the government has shaken up the rules governing the compulsory education sector.
Last autumn, it announced new rules, which thew into doubt private schools ability to continue operating non-profit models, using offshore variable interest entity (VIE) structures. If they have to transition to for-profit models, they will incur additional land and tax costs.
Analysts say it is still not clear what will happen when the new rules comes into force this September, potentially impacting Wisdom, Yuhua and China Maple Leaf, which all cater to both primary and secondary aged students.
M&A driven growth model
CNHE has two existing colleges in Yunnan and Guizhou, which both focus on applied sciences, making it China’s 12th largest private sector provider of higher education and the third largest in South West China by number of enrolled students.
At the end of 2016, the group had 33,462 enrolled students at its two existing schools and recorded a 98% graduate employment rate, above the 92.3% national average. Its blended utilisation rate stood at 85.1%.
Like many of its peers, the company plans to expand fast and future EPS growth will be driven by M&A as it seeks to scale up and lift the performance of new acquisitions.
The group is already in the process of incorporating two new colleges in Heilongjiang and Hubei, which will have a material impact on forecast 2017 profit numbers.
Syndicate research says net profit should more than double between 2016 and 2017 from Rmb112.2 million to Rmb241 million ($16.25 million to $34.97 million).
Its 2016 net profit margin was 32.9%
CNHE’s new Hubei campus in Enshi opened in August 2016, while its 73.91% acquisition of a college in Harbin is currently subject to Ministry of Education approval.
By contrast, Minsheng Education has three colleges in Chongqing and one in Inner Mongolia. It also holds a 25% stake in Hong Kong’s Beacon International College in Hong Kong.
Its 2016 net profit margin was 54.7% based on net profit of HK$274 million ($35.26 million), according to S&P Global Market Intelligence figures.
BNP Paribas is sole sponsor for CNHE’s IPO, with Citic CLSA and CCBI as joint global co-ordinators.
Listing scheduled for April 19.
