SINGAPORE (Apr 2): In our EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation) multiple versus 5-year Ebitda CAGR (compound annual growth rate) growth screen, some trends caught our attention. The big trend was the Ebitda growth of Chinese education stocks. These have shown strong growth and, judging from

their results announcements, revenues are likely to experience double-digit growth in the next quarter. Another trend was the underperformance of Singapore-listed education stocks Overseas Education, which had negative Ebitda growth, and Raffles Education Corp, which has shown a steep decline in Ebitda.

According to a DBS Group Holdings report last year on the Chinese education sector, Chinese education stocks could continue to be supported by the abolishment of the country’s one-child policy and increasing household income.

Separately, Deloitte said in a report last September that China’s education industry is in a period of rapid growth. Policy, capital, technology and social concept will continue to boost the industry, the report elaborated. Since the implementation of the two-child policy in 2016, the country’s new birth population has increased to 17.86 million, while that of the second and later-born children is now at 8.44 million. Deloitte says the size of China’s preschool education market reached RMB380 billion in 2016, and is expected to exceed RMB540 billion by 2020.

Now, with the matter of compulsory preschool education being raised at the Chinese People’s Political Consultative Conference, a new trend is emerging in China, according to Deloitte. Some provinces and cities, including Nanjing, are experimenting with a year’s compulsory preschool education. This will be implemented across the rest of Jiangsu province by 2020. Deloitte says, “It should be noted that incorporating preschool education into compulsory education is inevitable in the long run, but it is still uncertain whether this proposal raised by the Chinese People’s Political Consultative Conference could be adopted. If this proposal is passed, medium- and highend private kindergartens will be the biggest beneficiaries.”

While some beneficiaries mentioned in the report — such as Prokids Technology and HIT Robot Group — are unlisted, others such as RYB Education have American depository receipts (ADRs) listed on the New York Stock Exchange.

Prokids is a company that makes use of an imaging company Beva to build a complete system with watching, listening and gaming content. Prokids also jointly develops software and smart terminals with tech companies, and curriculum along with other resources on a cloud platform.

RYB Education now runs kindergartens, following earlier businesses developing teaching materials and a self-owned curriculum system for early childhood education. HIT Robot Group uses robotics to compile robot training materials and build robotics activity centres and robot labs across the world.

The best performer in terms of 5-year Ebitda CAGR in our table and chart is Bright Scholar Education, whose ADRs were listed on the NYSE in May 2017, raising US$181 million ($236.6 million). The company is one of the largest operators of international and bilingual schools in China. As at Nov 30, 2017, Bright Scholar operated 60 schools covering the K-12 (kindergarten to Year 12) academic needs of students across seven provinces in China. A total of 33,916 students were enrolled at its schools as at that date. Bright Scholar is collaborating with Country Garden Holdings to provide educational services at the developer’s mega residential projects.

The second-largest education company by market cap in China’s for-profit education league is New Oriental Education & Technology Group. Its ADRs are up 58% over the past 12 months.

In its 2QFY2018 ended Nov 30, 2017 results statement, executive chairman Michael Yu said the company’s deferred revenue balance stood at US$1.14 billion as at Nov 30, up 48.7% y-o-y. “Our K-12 all-subjects after-school tutoring business growth was augmented in [2QFY2018] with revenue up approximately 47% and enrolment up approximately 52% y-o-y. Our U-Can middle and high school all-subjects after-school tutoring business achieved revenue growth of approximately 45% and the revenue of POP Kids program rose approximately 51% yearover-year,” he said.

On Jan 23, New Oriental announced that it expected total net revenues in 3QFY2018 (Dec 1, 2017 to Feb 28, 2018) to be in the range of US$591.1 million to US$604.2 million, representing a y-o-y growth of 35% to 38%.

TAL Education looks fundamentally stronger than New Oriental, with better profit margins. It is the largest Chinese education company by market cap. Both TAL and New Oriental are overvalued by conventional benchmarks such as price-to-earnings and EV/Ebitda ratios and price-to-book valuation. For 3QFY2018 ended Nov 30, 2017, TAL reported net revenues of US$433.3 million, up 66.3% y-o-y. The increase was mainly driven by a rise in total student enrolments, which went up 85% to 1,543,740. Net income increased 198.4% y-o-y to US$40.7 million from US$13.6 million in 3QFY2017. The company announced that it was expecting net revenues for 4QFY2018 to be between US$474.5 million and US$480.8 million, an increase of 50% to 52% on a y-o-y basis, assuming no material change in exchange rates.

Tarena International was ranked No 2 in our 5-year Ebitda CAGR scan. Although its net revenues increased 25% y-o-y to RMB1.97 billion for FY2017 ended December, net income fell 23.6% to RMB184.8 million. The company announced that it was expecting net revenues for FY2018 to be between RMB2.30 billion and RMB2.45 billion, up 16.5% to 24.1% y-o-y.

How to buy and sell NYSE-listed stocks

Since the Chinese education stocks in our table are listed on the New York Stock Exchange, an account with a local broker that provides access to the US market, or TD Ameritrade, will enable trading. The stigma attached to Chinese listings is gradually dissipating, given the solid earnings reported by some of these companies. However, the share prices of a number of the companies have run up, and are overvalued based on PE and EV/Ebitda ratios.

Folkestone Education Trust stands out

In our Ebitda growth screen, a standout is Folkestone Education Trust, a real estate investment trust that invests in early learning properties. As a REIT, its share price is less volatile than pure equity, and it is underpinned by its yield and book value. For 1HFY2017 ended Dec 31, FET’s distributable income was up 12.3% to A$21 million ($21.2 million), while distribution per unit rose 6.3% to 7.55 Australian cents. An annualised DPU of 15.1 cents translates into a forward yield of 5.47%. During the year, the trust completed three development properties with a yield-on-cost of 7.5%, sold seven properties at an 11.2% premium-to-book value, and has a pipeline of properties valued at A$156.3 million.

Stocks on the Australian Securities Exchange can be traded on the platforms of Singapore brokers.

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