Seizing the golden age of China education sector; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Technology Software & Services Company Bright Scholar Date 18 October 2017 Initiation of Coverage Seizing the golden age of China education sector; initiating with Buy Reuters Bloomberg Exchange Ticker BEDU.N BEDU US NYS BEDU Forecasts And Ratios Year End Aug 31 2015A 2016A 2017E 2018E 2019E Sales (CNYm) 745.9 1,040.3 1,318.7 1,839.2 2,448.7 EBITDA (CNYm) -14.4 186.2 296.2 484.3 721.5 Reported NPAT (CNYm) -40.1 -36.4 189.9 332.0 512.0 Reported EPS FD(CNY) -0.43 -0.38 1.89 3.25 5.01 DB EPS FD(CNY) -0.43 0.61 1.89 3.45 5.21 DB EPS growth (%) – – 212.8 82.1 51.1 PER (x) – – 97.5 53.5 35.4 EV/EBITDA (x) – – 57.1 34.2 22.3 Source: Deutsche Bank estimates, company data Attractive growth outlook; initiate with Buy and TP of USD32 ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Price at 16 Oct 2017 (USD) 28.02 Price target - 12mth (USD) 32.00 52-week range (USD) 28.02 - 11.20 HANG SENG INDEX 28,693 Alvin Jiang Research Analyst (+852 ) 2203 6241 alvin.jiang@db.com Price/price relative 81216202428325/17Bright ScholarHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute 29.7 105.1 – HANG SENG INDEX 3.2 8.7 23.5 Source: Deutsche Bank We expect the China education sector to enjoy long-term structural growth driven by rapid urbanization, which should lead to higher household income, thereby driving demand for education services. We believe that the spending by the Chinese government should continue to lag the growth in demand, thereby opening up an attractive growth market for the private school groups. We initiate BSE, a leading private school, with a Buy rating and a TP of USD32 as we deem the group to be well positioned to ride the structural growth in the education services market. We expect non-GAAP income to record a CAGR of 77% in FY16-21E and sustainable net margin to reach ~26%. Strong management and unique asset-light business model allows BSE to strike balance between profitability and expansion BSE enjoys an early-mover advantage in the private school market being one of the earliest players (17 years vs. average 10 years in China). The company has accumulated rich industry knowledge and a solid reputation, which we believe are the two key success factors for schools. With a new management team, BSE has undertaken steps to better integrate its capabilities leading to higher monetization of services. This in turn has led to more consistency in quality across its school portfolio. Its close collaboration with Country Garden allows the company to operate an asset light model giving it agility in its expansion plans and stable profitability during the ramp up phase. Initiating with Buy and target price of USD32, implying 14% upside We initiate coverage of BSE with a Buy rating and a TP of USD32, based on our confidence in China’s up-and-coming education industry and BSE’s strong capability. Our valuation methodology is DCF using a WACC of 11.2% and terminal growth of 2%, consistent with our view on the l/t growth prospects for the education sector. Our target price implies a high P/E multiple (68x on FY18E coming down to 47x on FY19E) which is higher than peers but justified in our view by a strong growth outlook (page 8 for details). DB FY17E EPS estimates are 8% higher than consensus as we expect the company to be able to maintain a competitive advantage over peers to support margin recovery. Positive catalysts on the stock: (1) price hikes for star schools; and (2) successful acquisition with strong synergies. Risks to our TP: (1) weak enrollment in newly opened schools; and (2) regulatory risk. Distributed on: 17/10/2017 20:48:34 GMT0bed7b6cf11c 18 October 2017 Software & Services Bright Scholar Page 2 Deutsche Bank AG/Hong Kong Model updated:17 October 2017 Running the numbers Asia China Software & Services Bright Scholar Reuters: BEDU.N Bloomberg: BEDU US Buy Price (16 Oct 17) USD 28.02 Target Price USD 32.00 52 Week range USD 11.20 - 28.02 Market Cap (m) EURm 2,381 USDm 2,811 Company Profile Bright Scholar is the largest operator of international and bilingual K-12 schools in China. As of February 28, 2017, the company has