HLG Hailiang Education Group Inc **

Sector financial performance:

This company, who is a private school in China for K-12 students, has been grouped into private school K-12 sector in education industry.

It seems that demand for premium education in the past several years has been strong and has huge potentials to grow. It is particularly true in China and other developing countries as indicated by data from some of companies, which present an average of 8-20% growth in 2015, 2016, and 2017.

Our data indicate that there was a universal and significant decline in companies’ gross margins and operating margins in the past several years during the same time when their revenue increased as a result of both increase in tuition and enrollment. We think this is probably a result of increasing competition as we see usually from a booming industry. Schools have to spend more on compensation to retain quality teachers and accelerate expansion by acquisition at higher price. All of those drive companies’ gross margin up. The typical gross margins are in range of 24-36% with a SG&A as percentage of sales of average 15%.  The typical operating margin among those companies has gone down to the range of 13-18% from 18-26% about three years ago.

According to our analysis, the current companies’ enterprise price/EBI ratio is between 60 and76 with an interest/EBITDA ratio of 0-40%.

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Company performance:

It seems that the demand for this company education program has been very strong in the past several years as indicated by both increase in tuition and student enrollments.  The demand seems to be growing benefiting from strong growth in international market.

The first six months of fiscal 2018 compared with the same period of 2017(ended 20171230)

Net sales increased about 37% primarily due to increase (17% estimated) in average tuition and increase of 63% in enrollment of international program offset by decrease of 1% in enrollment in basic program.

The fiscal 2017 compared with the 2016(ended 20170630)

Net sales increased about 30% primarily due to increase of 16% in average tuition and increase of 12% in enrollment.

Fiscal 2016 compared with 2015

Net sales increased about 27% primarily due to increase of 19% in average tuition and increase of 7% in enrollment.

Fiscal 2015 compared with 2014

Net sales increased about 11% primarily due to increase of 7% in average tuition and increase of 4% in enrollment.

Its gross margin went down to 24% in 2016 from 35% since 2014 primarily due to largely increased labor costs as a result of more high quality teacher and increased employees’ compensation. During the same time, the SG&A as percentage of sales decreased by about 350 basis points due to the leveraging of expenses as a result of fast increased sales. Its operating margin went down to about 18% in end of 2016. While gross margin decrease largely this company’s cash flow still gained increase significantly due to successful transition of those increased costs to tuition. Cash flow continued to grow as gross margin and operating margin was improved in 2017.

Stock price

This stock currently has an enterprise price/sales ratio of 108 (RMB504). We think that its stock is being relatively overvalued considering that the strong increase in demand for this company’s service as reflected by increase in both tuition and enrollments may not be able to justify high ration currently.