Catalysts:
Fragmented market in China with 20% of children attending private schools (190 000 private schools in total), as the market leader, can gain more market share (if regulators allow it)
Risks:
Chinese government enacted a new law banning for-profit after school tutoring for K-12 in July 2021
Several new regulations in recent years, lowering the margins of the company
Company expects that new regulations will cause a drop of 50-60% in revenues
Delisting of Chinese stocks in the US (stock also traded in Hong Kong)
Currency volatilities and volatility of Chinese markets
Financial Analysis:
Valuations:
My personal Biases:
Think stock could make short-term recovery based on the news but that would be only speculating and not investing
Doesn’t see management coming up with a good enough solution to the upcoming headwinds
Assumptions:
Use the 60% fall in revenues that they are projecting for 2023-2026
50% fall in revenues for 2022 (counting the few months where they had normal operations)
Use the same average profit margin of 12%
FCF margin on average was 10 pb above profit margin but much of this FCF was from deferred revenue (upfront payments) and this will also be lowered by around 60%. Therefore, FCF margin is expected to be only 4 pb above profit margin, that is, 16%
Revenue growth of 5% per year after 2023
Discount rate of 20%
Terminal growth rate of 3%
Margin of safety of 30%
Exit Multiples based on P/FCF Ratio
FCF 40% higher in 2026 in bull case and 20% lower in 2026 in bear case
Conclusion
Overvalued and expected returns not worth it
Speculating rather than investing if wishing that price might go up based on the news
Read the full Research and Analysis: https://ishfaaqpeerally.teachable.com/courses/662813/lectures/36207621
