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By: Jing Han (S1705518080001) Demographics Equity Research Report China Thematic research August 2021 www.research.hsbc.com SPOTLIGHT China Vocational Education Backed by policy, driven by job-hungry graduates Rising competition for jobs is pushing students to turn to vocational training, a market we see doubling by 2025e compared with 2020 Unlike after-school tutoring this segment has policy support; leaders to benefit from strong brands, teaching and research Initiate on Chuanzhiboke with a Buy, our preferred name; maintain Buy on Offcn Education Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Demographics ● Equities August 2021 Why read this report? Rising competition for jobs is pushing students to turn to vocational training, a market we see doubling by 2025e compared with 2020 Unlike after-school tutoring this segment has policy support; leaders to benefit from strong brands, teaching and research Initiate on Chuanzhiboke with a Buy, our preferred name; maintain Buy on Offcn Education Jing Han* (S1705518080001) Head of A-share Media & Internet Research HSBC Qianhai Securities Limited jing01.han@hsbcqh.com.cn +86 10 5795 2344 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Market to double. This report takes a differentiated look at vocational education in China, a corner of China’s vast education market that’s backed by government policy as it helps university graduates find jobs. Using demographics and examining China’s economic structure, we show there will be an oversupply of highly-educated students for years to come. And where there are high-quality jobs on offer, they are concentrated in just a few areas. The result is the scramble to find jobs is getting tougher. That means demand for vocational training – which includes preparation for civil service exams and teaching qualifications – is heading higher as graduates look to find an edge to make them stand out. We see the market doubling by 2025 to RMB180bn from 2020. International perspective. This report also differs by looking at vocational education overseas to see how China compares. We find that strong partnerships between schools and corporates, like in Germany, can be an important driver for the market. And using the private market more, like how the US operates, can improve the supply of job training and keep unemployment down. Leaders to benefit. We prefer vocational training companies with strong teaching and research capabilities and a sound brand. Many of the entrance exams are seasonal, which favours larger players. Plus, the content needed for vocational education changes faster than K12 so trainees gravitate to large institutions with brand strength and those who can develop materials quickly. Maintain Buy on Offcn Education Technology (002607 CH, TP of RMB21.20). A leading vocational education provider with a focus on offering training for civil servant exams (45% market share), public institution exams and teacher recruitment. Stable civil service jobs are in demand given worries about the security of private sector jobs. Four key strengths: strong R&D, faculty staff, sales channels and a solid brand. We estimate 2021-23e revenue and attributable net profit CAGRs at 27% and 30%. Our TP is RMB21.20 (unchanged), implying c86% upside. We maintain our Buy rating. Initiate with a Buy on Chuanzhiboke (003032 CH, TP of RMB35.30). A provider of IT education and training through self-developed courses in 19 cities. The first A-share in the education industry to list on the Shenzhen Stock Exchange in 2021. We estimate 2021-23e revenue and attributable net profit CAGR at 24% and 27%. We use a P/E methodology and use a 2022e P/E of 57x, c1.0 SD above the average historical P/E. Based on 2022e EPS of RMB 0.62, we derive a target price of RMB35.30, implying c43% upside. We initiate with a Buy and it’s our preferred name. 1 Demographics ● Equities August 2021 Exhibit 1. Number of university graduates to stay high as shown by population data 25 20 15 10 People born between 1999 and 2008 will 5 graduate from college within the next decade 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: National Bureau of Statistics, the UN population projection, HSBC Qianhai Securities Exhibit 2. Number of university graduates (m) 14 12 10 8 6 4 2 0 Source: Ministry of Education, HSBC Qianhai Securities estimates Note: university graduate number = number of college graduates + postgraduates Exhibit 3. Growth in university graduates outpacing urban new jobs 6.0% 4.5% 3.0% 1.5% 0.0% 2015 2016 2017 2018 2019 -1.5% Growth rate of university graduates year on year Growth rate of urban newly-increased employment year on year Source: Ministry of Education, Department of Human Resources and Social Security, HSBC Qianhai Securities Exhibit 4. Market size and growth estimates of key segments in vocational training industry (RMBm) 100,00 0 80,000 60,000 40,000 20,000 - 1.9x 27,000 14,000 Civil service exam 2.0x 17,000 8,300 2.6x 23,000 9,000 2.4x 31,000 13,000 Public institutions recruitme nt Teacher recruitment exam Postgraduate entrance 2020 2025e exam Source: Company website, Offcn, Huatu, HSBC Qianhai Securities estimates 85,000 1.8x 47,000 IT training 2 Contents Why read this report? 1 Investment summary 4 Industry outlook 11 Sub-sectors of vocational training 20 Company section 29 Offcn Edu (002607 CH) 30 Chuanzhiboke (003032 CH) 38 Disclosure appendix 50 Disclaimer 53 Demographics ● Equities August 2021 3 Demographics ● Equities August 2021 Investment summary Vocational training market to double by 2025e compared with 2020 Rising demand is driven by job-hunting pressure Market share to be concentrated among the leading players Vocational education includes everything from civil service exam preparation to IT training Vocational education market to double by 2025e compared with 2020 University graduates in China are finding it harder to secure jobs. According to the statistics in Financial Times, the unemployment rate for people aged 20-24 with college degrees was 19.3% in June 2020 (Financial Times, 8 August 2021). The simple reason is the number of college graduates is growing faster than new jobs so there’s a scramble to find work. Job seekers are looking for an edge to make them stand out so are turning to vocational training. It’s a broad sector but includes everything from civil service exam preparation to IT training. Just as importantly in this current environment, it doesn’t include after-school tutoring which is facing a regulatory clampdown. As we detail in this report, we expect to see rapid growth and for the market to exceed RMB180bn by 2025e, more than double the level in 2020. While vocational education can refer to education that provides academic qualifications, this report focuses on training that provides skills or professional knowledge for job-hunters. We look at three major segments: 1) recruitment exams that target fresh graduates; 2) improvement training which includes postgraduate entrance exams and exams to get students into colleges and universities; and 3) vocational skills training which offers IT, finance, judicial and other exams. We also show how the vocational training market is more concentrated than K12 training given many of the entrance exams they train students for are seasonal which is a model that favours larger players. Plus, vocational education is frequently changed faster than K12 so trainees gravitate to large institutions with brand strength and who can develop their materials faster. Exhibit 5. China education industry breakdown Academic education Kindergarten 0-6 years Secondary vocational school Primary school Middle school High school Primary education Secondary education 6-15 years 15-18 years Early education K12 tutoring Nonacademic education Source: HSBC Qianhai Securities Higher vocational school Undergraduate school Higher education 18 years and above Non-academic education Recruitment exams training： Civil servants, Teachers Vocational improvement training： Postgraduate entrance exams，Exam of upgrading from colleges to universities Vocational skills training： IT, finance 4 Demographics ● Equities August 2021 Exhibit 6. Three segments of vocational training Type Motivation Recruitment exams training Civil service examinations, public institution recruitment, teacher recruitment Seeking jobs through passing exams Industry features Seasonality; concentration in a certain period Target customer Fresh graduates Market size Small; RMB10bn Rigid demand High Market landscape Highly concentrated among leaders Source: HSBC Qianhai Securities Vocational improvement training Graduate entrance exams, exams for colleges as well as adult university entrance exams Higher academic qualifications and enhance jobhunting competitiveness Seasonality Fresh graduates and company employees Medium Medium Increasingly concentrated Vocational skills training IT, finance, medical and judicial Obtaining skills or qualifications Weaker seasonality; demand scattered throughout the year Mainly serving company employees and part-time students Large; RMB100bn Average Fragmented Exhibit 7. Market size and growth estimates of key vocational training segments (RMBm) 100,00 0 80,000 60,000 40,000 20,000 - 1.9x 27,000 14,000 Civil service exam 2.0x 17,000 8,300 2.6x 23,000 9,000 2.4x 31,000 13,000 Public institutions recruitme nt Teacher recruitment exam Postgraduate entrance 2020 2025e exam Source: Company website, Offcn, Huatu, HSBC Qianhai Securities estimates 85,000 1.8x 47,000 IT training Exhibit 8. Growth drivers for the key segments in vocational training industry Applicant number (m) Penetration rate (%) ASP (RMB) Market size (RMBm) 2020-2025 market size CAGR 2020-2025 growth multiple Growth driver Civil service exams 2020 2025 6.5 7.1 30% 45% 7,000 8,500 14,000 27,000 14% 1.9x Public institutions recruitment 2020 2025 7.5 8.3 20% 30% 5,500 6,700 8,300 17,000 15% 2.0x Higher penetration rate Higher penetration rate Postgraduate Teacher recruitment entrance exam 2020 2025 2020 2025 6.0 9.0 3.8 4.8 30% 40% 50% 75% 5,000 6,300 7,000 8,500 9,000 23,000 13,000 31,000 21% 19% 2.6x 2.4x Applicant number increase Higher applicant number and penetration rate ____IT training _____ 2020 2025 47,000 13% 1.8x 85,000 Higher trainee participation number Source: Company website, Offcn, Huatu, HSBC Qianhai Securities estimates Could K12 after-school tutoring companies muscle into vocational education? As has been widely reported, since the start of this year the after-school K12 tutoring industry has become strictly regulated. The result is some companies operating in this sector are planning to transform their business models and move into other educational segments, with vocational education being one of the options. According to Duozhi, TAL Education Group has a ‘Qingzhou’ brand that covers postgraduate exam preparation with around 23m registered users in May 2021. Meanwhile, Gaotu Techedu has said it is expanding into vocational education, including civil service exams, postgraduate exams, financial training and medical training. However, we believe it is hard for these K12 tutoring companies to transform fully into vocational education companies, given: 5 Demographics ● Equities August 2021 Germany uses a “dual system” where corporates and schools team up to train staff Client base: Vocational education students are adults, while K12 tutoring is for minors. K12 education companies will need to spend time and capital to move into this new client base. R&D: The content for K12 tutoring and vocational education is totally different. The top players in the vocational education industry have already built up large and strong R&D teams and it is hard to copy this. For example, Offcn Edu had more than 3,000 R&D employees at the end of 2020. Operational model: Vocational education is very different as the customer life cycle is short, there is strong seasonality given exams typically occur just once or twice a year, and there is wide regional distribution across the country. It also relies on: 1) word of mouth referrals rather than online marketing; 2) responding quickly to customer needs; and 3) extensive selling channels. We believe that even if K12 education companies were to develop these abilities, they would still need three to five years to build up their business to a decent size. Take Fenbi Education (a leading online vocational education company) as an example. It was founded in 2015 and took four years to expand its user base to 4.1mn and revenue to RMB820mn in 1H19. Learnings from Germany and the US To provide an international perspective we looked at two developed markets, Germany and the US. In Germany, the use of a “dual system” where corporates and schools team up to train staff is popular and plays an important role in youth employment. In the US vocational education depends more on the free market with listed companies offering boot camps and online universities. Our takeaway is that partnerships between schools and corporates are an important driver of developing vocational education, while the private market is an effective way to improve the supply of job-oriented training which helps to keep unemployment down. Exhibit 9. Vocational education enrollment in Germany 100% 80% 60% 40% 20% 0% 2015 2016 2017 2018 2019 Dual System Vocational education in school Source: BMBF, HSBC Qianhai Securities estimates Exhibit 10. Enterprises in Germany participating in vocational education All enterprises Large enterprises Medium enterprises Small enterprises Micro enterprises 19.7% 81.3% 65.8% 42.6% 11.2% 0% 20% 40% 60% 80% 100% Source: BMBF, HSBC Qianhai Securities estimates A corner of the education sector that’s strongly supported by policy Strict regulations have largely put the brakes on China’s education sector, especially the K12 tutoring segment since the spring of 2021. But for vocational education it’s a different story as policy has been supportive given it is a part of the education sector that has a positive impact on enhancing the quality of the labour force and facilitating employment. To be more specific, regulations for vocational education are more relaxed in terms of asset securitization, school permits, approving authorities and teacher certificates (see Exhibit 21). 6 Demographics ● Equities August 2021 Offcn Education Technology (002607 CH, Buy, TP of RMB21.20) Offcn Education is a leading vocational education provider with a focus on offering training for civil servant exams (45% market share in 2020), public institution exams and teacher recruitment. It also has new divisions like training up graduates to take admission tests for corporate jobs and providing IT training. As a result, Offcn Education serves college students and job seekers aged 18-45 and offers more than 100 lines of different training products. It also has four key strengths: strong R&D, faculty staff, sales channels and a solid brand, in our view. We expect its market share to grow in civil service exams, public institution recruitment, teacher recruitment and postgraduate exams. As a result, we estimate Offcn Education’s 2021-23e revenue and net profit CAGR to be 27% and 30%. We continue to use a PE multiple to value the stock (see Offcn Edu: We expect earnings to recover in 2H21e, 21 July 2021). We continue to use 46x 2021e PE to value the stock, which is 1SD below the historical average (unchanged). Based on 2021e EPS of RMB0.46 (unchanged), we arrive at our new TP of RMB21.20 (unchanged). Our TP implies c86% upside; accordingly, we maintain our Buy rating on the stock. Chuanzhiboke (003032 CH, Buy, TP of RMB35.30) Founded in 2006, Chuanzhiboke provides IT education and training through self-developed courses in 19 cities. It was the first A-share in the education industry to list on the Shenzhen Stock Exchange in 2021. One of its strengths is it has been winning customers at a low cost thanks to its good reputation and word of mouth referrals. We expect its market share in IT training will increase to 2.3% in 2023e from 1.4% in 2020. We estimate 2021-23e revenue and attributable net profit CAGR at 24% and 27%. We use a P/E methodology to value this stock. We use a 2022e P/E of 57x, c1.0 SD above the stock’s average historical P/E. Based on our 2022e EPS of RMB 0.62, we derive a target price of RMB35.30, implying c43% upside. We initiate coverage with a Buy rating and it is our preferred name. Where we are different from consensus Industry catalysts: The market mostly focuses on academic qualification training while vocational training (i.e. non-academic qualification training) is often overlooked. Not only do we focus on this neglected sector, but also examine it from a population and economic perspective and find that the oversupply of highly-educated students will continue in the long term with highquality jobs concentrated in just a few areas. This is leading to job-hunting pressure and provides sustainable growth for the vocational training industry. We expect the aggregate market scale of the key five segments (civil service exams, public institution training, teaching professions, postgraduate university admittance, and IT training) will exceed RMB180bn by 2025e, double the level in 2020. An international perspective: As we detailed above, we look at Germany and the US to see how China compares and what the takeaways are. Chuanzhiboke: Our 2021/22e net profit estimates are broadly in line with consensus, with a 1.1%/0.0% variance. But our 2023e earnings estimate is 2.7% above consensus as we are more optimistic on trainee numbers, boosted by higher campus utilization and new curricular development. 7 Demographics ● Equities August 2021 Offcn Education: Factoring in more intense competition to the firm’s revenue, and the impact of rising labour costs on gross margins, our 2021e, 2022e and 2023e net profit estimates are 4.9%, 6.3% and 7.1% below Wind consensus, respectively. Exhibit 11. HSBC Qianhai estimates vs consensus Chuanzhiboke Offcn Education RMBm Revenue Net profit Revenue Net profit HSBC Qianhai estimates 2021e 2022e 2023e 1,055 1,327 1,590 192 250 308 14,005 17,798 22,466 2,839 3,711 4,801 Source: Wind, HSBC Qianhai Securities estimates ___ Wind consensus _____ 2021e 2022e 2023e 1,070 1,330 1,553 190 250 300 15,187 19,695 24,930 2,987 3,960 5,168 ______ Difference _______ 2021e 2022e 2023e -1.4% 0.0% 2.4% 1.1% 0.0% 2.7% -7.8% -9.6% -9.9% -4.9% -6.3% -7.1% Share price catalysts If the economy slowed down then vocational training demand could increase, especially for civil service jobs amid increased job-hunting pressure. The segments that make up vocational education are highly fragmented. That means leading players with solid brands, financial strength and extensive outlets are well positioned to consolidate and gain more market share. Key industry risks The education industry is strictly regulated so any new regulations will impact the market. Competition from online education institutions such as Fenbi Education, which is expanding, could pressure the industry, especially offline training institutions. The COVID-19 outbreak in 2020 disrupted offline operations which is a major issue for vocational education as most students still prefer offline training. If the pandemic worsened it could lead to less applicants and impact the operations of vocational education training. ESG matrix Environment: Our covered companies are low-consumption and low-pollution education enterprises. Social responsibilities: Vocational education companies provide employment training services and help ease unemployment. For instance, Chuanzhiboke has trained over 150,000 specialized students and improved their employment capabilities. In 2020, Offcn Education provided employment training to 4.49m people, including fresh university graduates. And in poverty alleviation, Chuanzhiboke has helped over 100,000 students in rural areas, while around 30% of Chuanzhiboke’s students are from rural families. 8 Demographics ● Equities August 2021 Exhibit 12. Peers’ valuation comparison Net Market profit CP TP cap ADTV __ P/E (x) _ Net profit growth CAGR __ ROE (%) __ __PEG (x) __ Company Ticker Rating Unit Ccy Ccy Upside USDm USDm 21e 22e 23e 21e 22e 23e 21-23e 21e 22e 23e 21e 22e 23e Vocational Education Chuanzhiboke* 003032 CH Buy RMB 24.77 35.30 43% 1,543 27 52 40 32 196% 30% 23% 27% 20% 22% 21% 1.93 1.48 1.19 Offcn Education* 002607 CH Buy RMB 11.40 21.20 86% 10,844 75 25 19 15 23% 31% 29% 30% 61% 66% 69% 0.83 0.63 0.50 China East Edu 0667 HK NR HKD 8.20 2,313 7 15 12 11 309% 20% 13% 16% 15% 16% 16% 0.92 0.73 0.68 Eastern Pioneer Driving School 603377 CH NR RMB 8.16 919 18 20 17 13 81% 21% 26% 24% 6% 7% 8% 0.84 0.70 0.56 Average 28 22 18 152% 26% 23% 24% 26% 28% 29% 1.13 0.89 0.73 K12Education TAL Education TAL US NR USD 5.84 3,766 318 11 5 3 - 123% 63% 90% 4% 11% 15% 0.12 0.05 0.03 New Oriental EDU US NR USD 2.10 3,637 234 5 4 3 49% 36% 31% 34% 17% 19% 17% 0.15 0.11 0.08 Gao Tu GOTU US NR USD 3.18 810 390 - - 4 -66% 40% 204% - 0% 5% 31% - - - China Yuhua Education 6169 HK NR HKD 4.54 1,959 10 10 8 8 524% 22% 11% 16% 28% 29% 27% 0.61 0.52 0.48 Tianli Education 1773 HK NR HKD 2.17 604 10 7 5 4 39% 40% 46% 43% 14% 16% 20% 0.17 0.11 0.09 China Maple Leaf Education 1317 HK NR HKD 1.53 589 4 6 6 5 15% 17% 16% 16% 12% 12% 13% 0.40 0.35 0.30 Doushen Education* 300010 CH Buy RMB 4.11 14.90 263% 550 45 13 9 - - 41% - - 17% 21% - - - - My Gym* 002621 CH Buy RMB 4.30 7.20 67% 548 5 18 15 - 103% 22% - - 11% 12% - - - - Average 10 7 5 111% 43% 62% 40% 13% 16% 21% 0.29 0.23 0.20 Higher Education China Education 0839 HK NR HKD 13.84 4,045 16 19 16 13 115% 22% 18% 20% 14% 15% 15% 0.96 0.81 0.65 Hope Education 1765 HK NR HKD 1.39 1,427 14 12 9 8 575% 25% 26% 26% 12% 14% 14% 0.45 0.34 0.29 China Kepei Education 1890 HK NR HKD 4.26 1,104 2 9 7 7 36% 23% 18% 21% 21% 21% 21% 0.43 0.35 0.31 China New Higher Education 2001 HK NR HKD 4.13 842 4 9 8 6 241% 25% 17% 21% 22% 23% 23% 0.44 0.37 0.29 Edvantage 0382 HK NR HKD 5.76 794 3 11 8 7 53% 43% 24% 34% 20% 23% 24% 0.33 0.24 0.20 Average 12 10 8 204% 28% 21% 24% 18% 19% 19% 0.52 0.42 0.35 Note: priced as of 6 August 2021 Source: Wind, HSBC Qianhai Securities estimates (*covered stocks). NR = stocks not rated by HSBC Qianhai Securities. CP = current price, denominated in RMB, HKD or USD depending on location of primary listing 9 Demographics ● Equities August 2021 Valuation and risks Chuanzhiboke 003032 CH Initiate at Buy Current price: RMB24.77 Target price: RMB35.30 Upside: +43% Valuation Risks We use a P/E multiple methodology to value the stock. We expect a Key downside risks 2021-23e net profit CAGR of 27%, higher than the 2019-21e CAGR More intense industry competition (3%). Therefore, we use a 2022e P/E of 57x, c1.0 SD above the Operating qualifications are revoked Suspension of classes caused by the epidemic average historical P/E. Based on our 2022e EPS of RMB0.62, we derive a target price of RMB35.30, implying c43% upside. We initiate coverage with a Buy rating. Jing Han* | jing01.han@hsbcqh.com.cn | +86 755 83644 Offcn Edu 002607 CH Buy 入 Price: RMB11.40 Target Price: RMB21.20 Upside: +86% We use a P/E multiple methodology to value the stock (see Offcn Edu: We expect earnings to recover in 2H21e, 21 July 2021). We estimate the firm’s 2020-23e net profit to grow at a CAGR of 28% (unchanged), vs 41% in 2018-20e. We continue to use 46x 2021e PE to value the stock, which is 1SD below the historical average (unchanged). Based on 2021e EPS of RMB0.46 (unchanged), we arrive at our TP of RMB21.20 (unchanged). Our TP implies c86% upside; accordingly, we maintain our Buy rating on the stock. Jing Han* | jing01.han@hsbcqh.com.cn | +86 755 83644 Key downside risks New regulations for recruitment exam training Deteriorating competitive environment Lower profit margin due to higher labour costs Note: Priced as at 6 Aug 2021. Source: Wind, HSBC Qianhai Securities estimates *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations 10 Demographics ● Equities August 2021 Industry outlook More graduates than jobs, leading to employment challenges Two key issues: employment pressure on undergraduates and a divergence in remuneration and opportunities in various industries We stress that vocational education is supported by policy Finding jobs for undergraduates is getting more difficult Labour supply Over the long term, we expect to see an excess of highly educated graduates in China, which will create employment difficulties. A lot of this is down to demographics. According to the Seventh National Population Census data announced in May 2021, China will see continued steady growth in its total population, and a significant rise in educational levels. All this matters as the vocational training and education industry, and the subject of this report, is closely related to employment which is itself affected by supply and demand for labour. To put all this into numbers we first look at the big picture population statistics. The number of people with a university education is currently around 218m, out of a total population of 1.41bn. That number has been growing rapidly over the past decade as back in 2010 just 8,930 per 100,000 received a university education, but that has since risen 70% to 15,467. Similarly, those entering higher learning − undergraduate courses and specialist courses − grew from 6.62m in 2010 to 9.67m in 2020, up around 46% over the decade. Stepping back further, we find there are three sources of new labour: migrant workers from rural areas, secondary vocational school students and college graduates (see China Bounce: How to get jobs back, 15 April 2020). Migrant workers were once the major part of the labour force, but they have gradually declined over the past decade. Instead, the number and proportion of college graduates has been growing. College graduates amounted to 8.22m in 2019, representing 50% of the new labour force. College graduates typically have high career development expectations and tend to apply for high-end positions. However, since 2015, growth in college graduates has been faster than that of new jobs in urban areas, resulting in employment difficulties for graduates. The Ministry of Education projects the number of college graduates to be 9.09m in 2021e, up 350,000 from 2020. Considering the continued growth in the enrollment of undergraduates and graduate students in 2017-20, we expect the number of college graduates to keep rising over the next three years. We expect it may reach 11m by 2024e. 11 Demographics ● Equities August 2021 Exhibit 13. Number of newborns in China (m) 25 20 15 10 People born between 1999 and 2008 will 5 graduate from college within the next decade 0 Source: NBS, UN estimates, HSBC Qianhai Securities estimates 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Exhibit 14. Enrollments of undergraduates (m) and specialist students and y-o-y growth (m/%) Source: NBS, HSBC Qianhai Securities Exhibit 15. Sources of new labour force (m/%) 30 60% 50% 20 40% 30% 10 20% 10% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 University graduates (minus further education enrolment) Vocational school graduates Newly increase migrant workers Newly increase migrant workers % new laborers (RHS) University graduates % new laborers (minus further education enrolment)(RHS) Source: MOE, NBS, HSBC Qianhai Securities 12 Demographics ● Equities August 2021 Exhibit 16. Number of college graduates (m) 14 12 10 8 6 4 2 0 Source: MOE, HSBC Qianhai Securities estimates Note: Number of college graduates = number of undergraduates + number of postgraduates Exhibit 17. Growth in the number of college graduates is faster than that of new employment in urban areas 6.0% 4.5% 3.0% 1.5% 0.0% 2015 2016 2017 2018 2019 -1.5% Growth rate of university graduates year on year Growth rate of urban newly-increased employment year on year Source: MOE, Ministry of Human Resources and Social Security, HSBC Qianhai Securities Quality jobs are concentrated in just a few areas Since 2010, China’s economy has been transforming and resulting in major changes to where and how people are employed. Quality job positions are now concentrated in just a few emerging industries: 1. Due to rising labour costs and other factors the share of secondary industry, led by manufacturing, has been shrinking as a share of GDP since 2010. Low-end manufacturing is gradually moving out of the country as China shifts to “high-end manufacturing”. As a result, jobs in modern manufacturing have higher technical requirements with demand growing for high-end technical talent. 2. The proportion of the tertiary industry in GDP has been rising, reaching 54% in 2019, while the proportion of employees was 47%. Demand for talent for this industry – including for finance, IT, and commercial services – has been growing. China’s digital economy has also been rapidly developing. With capital resources concentrated on the internet industry, we find remuneration for staff in that industry has risen. In 2008-19, annual remuneration in the private IT and financial services industries were RMB85,000 and RMB76,000, respectively, having grown more than other industries over the last decade. Exhibit 18. China’s three main industries as a proportion of GDP… 60% 50% 40% 30% 20% 10% 0% Exhibit 19. …and their proportion of employment 60% 50% 40% 30% 20% 10% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Primary industry Tertiary industry Source: NBS, HSBC Qianhai Securities Secondary industry Primary industry Tertiary industry Source: NBS, HSBC Qianhai Securities Secondary industry 13 Demographics ● Equities August 2021 Exhibit 20. Employees of non-private sectors (Unit: m ppl) 10 8 6 4 2 0 Agriculture Electricity, gas Information, Wholesale & Accommodation and water supply software and IT retail and food service Finance 15% 10% 5% 0% -5% -10% Real estate 2008 2010 Source: Wind, HSBC Qianhai Securities 2012 2014 2016 2019 2009-2019年CAGR Exhibit 21. Annual salaries of employees of private sectors (RMB) 100,000 80,000 60,000 40,000 20,000 0 Source: Wind, HSBC Qianhai Securities 2008 2010 2012 2014 2016 2019 Vocational training is growing, driven by job hunting pressure In our analysis of labour supply and demand, we find two important characteristics of China’s job market: 1) growing employment pressure for undergraduates; 2) significant divergences in remuneration and career opportunities across various industries. We also looked at two surveys: According to “2021 college student job survey” by Zhaopin.com, SOEs are the type of enterprises undergraduates most want to enter, representing 42.5%; the proportion hoping to enter national institutions like the government and public schools also doubled from 2020 to 11.4%, showing graduates are searching for stability. Taking a separate graduate employment report by Tsinghua University as a reference, most people chose IT, finance, education and public management industries in 2020 (68% of total). Of these, the number of people choosing IT, education and public management has significantly increased compared to 2016. As a result, we find undergraduates mainly look for two things: a high salary and job stability. 14 Demographics ● Equities August 2021 (1) High salary. Due to higher remuneration in the financial services and IT industries, these two industries have become popular choices, leading to related vocational training (e.g. certificate exam tutorials, IT skills training, etc). (2) Stability. As it is hard to get a high-paying job, many college graduates choose government vacancies for their stable remuneration, low unemployment risk and high social status. Government vacancies include jobs such as civil servants, teachers, and other jobs in public institutions. In recent years, the popular “civil service exam” has created a market for recruitment exam training. As most of these positions have certain education level requirements, they also provide market opportunities for career improvement counselling such as postgraduate entrances and top-up degree programmes. Exhibit 22. Employment industry of Tsinghua University graduates 30% 20% 10% 0% 2016 IT Education Scentific research Electricity Construction Others 2018 2020 Finance Public management Manufacturing Business service Real estate Exhibit 23. Employment type preferred by new graduates 50% 42.5% 40% 36.0% 30% 25.1% 19.0% 20% 14.103%.2% 11.4% 10% 5.6% 0% State-owned Private Public Government enterprise enterprise institution 2020 2021 Source: Tsinghua University graduate employment quality report , HSBC Qianhai Securities Source: Zhaopin.com, HSBC Qianhai Securities International perspective – Germany and the US To better understand where China might be heading in regard to vocational education we look to Germany and the US for comparisons. Germany: Legislation supports vocational education; schools + enterprises cooperate The characteristics of Germany’s vocational education system are: 1) government legislation supports the development of vocational education to enable a range of choices for students; and 2) enterprises are active in participating in vocational education. Back in 2005, the revised Berufsbildungsgesetz (Vocational Training Act) stipulated that federal governments participate in corporate education (part of vocational education) under the socalled dual system (see below), while state governments are responsible for school education. The choice between vocational education and ordinary education for German students begins after they graduate from primary schools. According to Statistisches Bundesamt, around 40% of German students choose vocational education. The “dual system” is the major form of German vocational education. Corporates and schools team up to teach students and implement a system of dual certificates. Theory teaching and practical teaching are shouldered by schools and corporates, respectively, with a learning time ratio of 3:7. After graduating, students can obtain academic certificates from schools and vocational qualification certificates from enterprises. According to data from Bundesministerium für Bildung und Forschung (Federal Ministry of Education and Research), students in Germany’s dual system accounted for 65-70% of the total of all students who choose vocational education in 2015-19. 15 Demographics ● Equities August 2021 Given school and corporates partner in the “dual system”, it means students can meet corporate needs and enhance their employment rates. Around 19.7% of enterprises participate in vocational education. Among various enterprises, the participation rate of large enterprises is more than 80%. Germany’s developed vocational education system plays an important role in protecting youth employment and maintaining balance in the labour market. According to the OECD, the unemployment rate of Germany’s youth aged 15-24 has been lower than the average for OECD countries since 2008. Exhibit 24. Vocational education enrollment in Germany 100% 80% 60% 40% 20% 0% 2015 2016 2017 2018 2019 Dual System Vocational education in school Source: BMBF, HSBC Qianhai Securities estimates Exhibit 25. Enterprises participating in vocational education All enterprises Large enterprises Medium enterprises Small enterprises Micro enterprises 19.7% 81.3% 65.8% 42.6% 11.2% 0% 20% 40% 60% 80% 100% Source: BMBF, HSBC Qianhai Securities estimates US: New institutions emerging on the back of market forces Unlike Germany, vocational education in the US depends more on the free market. There are various vocational educational institutions in the US that provide a range of services. Community colleges are the main vocational education providers and offer two-year schooling, providing skilled talent for the local employment market. Professions include accounting, computing and nursing. According to the National Student Clearinghouse, 5.4m were enrolled in community colleges in 2019. In the US, there are also multiple listed companies engaged in vocational education. Most of them are job-oriented and provide training programmes in IT, commerce and health. In addition, many new vocational education institutions, such as coding bootcamps and online universities, have been emerging in the US in recent years. Coding bootcamp: Provides coding training through offline centralized learning where students learn coding by joining a camp. Fullstack Academy is one example. It offers threemonth programs and the tuition fee is around USD18,000, enabling students to master employment skills needed in IT enterprises. Online universities: Taking Western Governors (an online university based in Utah) as an example, it has around 100,000 students and offers bachelor’s and master’s degrees in four sectors: business, education, IT and healthcare. The university aims to develop professional skills and enhance students’ employment competitiveness, and has no hard requirements for credits and hours. Whether the students can master the knowledge and skills is the sole criteria the university doesn’t have requirements for credits, it just aims to help students learn skills. According to data on the school’s website, the average increase in salary is over USD12,000 two years after graduating. 16 Demographics ● Equities August 2021 Exhibit 26. US vocational education listed companies Ticker TWOU.O ATGE.N STRA.O PRDO.O APEI.O LINC.O Company Company description 2U An education and technology company, partnering with the world’s top universities to provide online learning Adtalem Global Education Provides professional education services such as vocational education and higher education Strategic Education Provides undergraduate and graduate courses, including business management, accounting, IT, education, healthcare and public management Perdoceo Education Provides a range of courses including visual communication, design technology, business administration and cooking American Public Education An educational institution that provides online learning and adult education, offering 100 degree projects and 95 certification programs Lincoln Educational Services Provides degree and diploma course learning covering five areas: health science, automotive technology, skilled trades, business and information technology Source: Company website, HSBC Qianhai Securities Two takeaways for China from the international experience (1) Partnerships between schools and corporates can develop vocational education. In Germany’s “dual system” vocational education model, enterprises play an important role, providing expenses and internship opportunities. Students obtain practical skills and strengthen their employment competitiveness. Enterprises also use the dual system as an important channel to recruit new employees, creating a win-win situation for students and corporates. In March 2021, China issued the draft of its “vocational education law” which included sections on “the function of corporates in vocational education”, “facilitating the fusion of industry and education, cooperation between schools and corporates”. We expect a policy supporting cooperation between schools and corporates will be gradually launched. (2) Job-oriented training demand driven by the private market. The US vocational education market is driven by training institutions. In addition to community colleges, private training companies provide diversified education products. The Chinese government has launched various policies in recent years to encourage the private market to participate in vocational education, and will provide an encouraging environment for the development of the industry. Supporting policies to be rolled out gradually As vocational education has a positive impact on enhancing the quality of the labour force and providing employment, policy and funding have been supportive for vocational education. In China’s “14th Five-Year Plan,” passed in November 2020, the key policies surrounding vocational education were as follows (the emphasis in bold is ours): “Highlighting the characteristics of vocational technical education, deepening reform and innovation, optimizing structure and deployment, vigorously cultivating talents. Improving national standard of vocational technical education, carrying out “academic certificate + vocational technical level certificate” system. Innovating teaching model, deepening the integration of industry and education, cooperation between schools and corporates, encouraging corporates to develop quality vocational technical education, exploring the apprentice system with Chinese characteristics. Improving quality of modern vocational technical education, building high-level vocational technical schools and professions, steadily developing vocational degree education. Deepening the fusion of vocational and ordinary education, achieving two-way mutual recognition, vertical mobility of vocational technical education and ordinary education. 17 Demographics ● Equities August 2021 — Cited from Section 2, Chapter 43 − “Strengthening adaptability of vocational technical education” in the Chinese Government’s “14th Five-Year Plan,” 2020 China’s “14th Five-Year Plan” puts forward a policy target surrounding improving the vocational education system and running schools with private capital. It includes “implementing [an] ‘academic certificate + vocational technical level certificate’ system”, “encouraging enterprises to develop quality vocational technical education” and “building a number of high-level vocational technical schools and professions, steadily developing vocational degree education” along with other policies. Latest law encourages vocational education The Regulations on the Implementation of the Non-state Education Promotion Law were rolled out in May 2021 with updates to vocational education including: Section 7: Public schools for vocational education can attract corporate capital, technology, management and other elements to run or participate in running for-profit private schools for vocational education. Section 9: The country encourages enterprises to legally run or participate in running private schools for vocational education with sole proprietorship, joint ventures, or partnerships. This clearly shows the encouragement of private capital to participate in vocational education as well as joint development with both the public and private sectors. Vocational education regulations are more relaxed than other educational segments From the perspective of capital entry barriers, attitudes towards running schools with private capital, and the intensity of supervision, regulations on vocational education are more relaxed compared to K12 or higher education (see Exhibit 15). The core policy points are: School permit needed? Before the “Non-state Education Promotion Law” in 2017, most parts of the country did not require a school license for private training institutions. After this law, local authorities came to different conclusions about whether private training institutions need school permits. Policy details vary in different places. There are no specific nationwide stipulations yet. Approving authority For private schools conducting vocational qualification training and vocational skill training, according to the stipulation set by the country, approvals are needed by Human Resources and Social Security Administration Departments of People’s government above the county-level, and then sent to the education administrative department of the same level for records. Correspondingly, private schools engaged in formal degree education and preschool education are approved by the Ministry of Education department. Teachers need to hold a certificate to work No specific stipulation on this issue. Policy on asset securitization Compared to the early childhood and K12 education sector, vocational education institutions are less restricted in terms of asset securitization. 18 Exhibit 27. Capital entry barriers, support for private education and supervision intensity of policy for major sub-sectors Preschool of education Grade 1 - 12 Private higher education Vocational education Formal education Early education after school Kindergarten Extracurricular training Subject tutoring Compulsory education stage High school _________________ Capital entry barriers ____________ Policy support for Foreign investment Asset securitization private education Subject tutoring: Forbidden Extracurricular training: Foreign investment is limited to JV, and should be dominated by Chinese Subject tutoring: Forbidden Extracurricular training: Generally registered as corporate, unaffected shareholders Subject tutoring: Online training is not allowed. Offline subject tutoring is forbidden. New subject tutoring will no longer be approved by local governments. Extracurricular training: No specific stipulation Private capital cannot control Foreign investment is kindergartens and not-for-profit Encouraged. There’s been a limited to JV, and should be kindergartens run by state-owned series of supportive policies dominated by Chinese assets or collective assets; private regarding land, tax and shareholders kindergartens cannot be solely government subsidies listed nor listed as a part of assets _________________________ Supervision intensity ___________________________ School permit needed? Approving authority Teachers need to work with a certificate? Subject tutoring: Forbidden. Extracurricular training: No specific stipulation Subject tutoring: Forbidden. Extracurricular training: Directly Subject tutoring: Forbidden. apply for legal person registration from Extracurricular training: No the Administration for Industry and specific stipulation Commerce Yes Education administrative department above county level Teachers of kindergarten need to obtain kindergartener qualification certificate No specific stipulation No specific stipulation More regulations to come Subject training teachers need to obtain a teacher Foreign capital is not allowed to control or participate in subject tutoring institutions through mergers, acquisitions, entrusted operations, franchising Subject tutoring institutions shall not be listed. Public company do not allow to invest on subject tutoring institutions on public market and to acquire related assets by issuing stocks and cash New subject tutoring institutions will no longer be approved by local governments. Online subject tutoring institutions need to be approved by the government Yes Education administrative department above county level qualification certificate. Hiring foreigners staying in China: must follow the relevant state regulations. Hiring foreigners abroad for training business is forbidden Prohibited Chinese-foreign cooperative education, dominated by the Chinese party Must be characterized as not-forprofit schools; Group M&A prohibited More restrictive measures. Sichuan and Jiangsu have suspended the approval of new schools Chinese-foreign cooperative education, dominated by the Chinese party Corporate system and for-profit Encouraged. There have been a series of favourable policies Yes Education administrative department above county level Yes Education administrative department Teachers of private schools above county level under formal education need to obtain a teacher qualification certificate Education administrative department of Yes State Council and Provincial People’s Government private schools unaffected Encouraged Encouraged Various local competent authorities have different understandings on whether private training institutions need school permit; no specific nationwide stipulation According to the stipulation set by the country, approval is needed by the Human Resources and Social Security Administration Departments of People’s government above county level, and then it is sent to the education administrative department of the same level for record keeping No specific stipulation Supportive Non-Supportive Demographics ● Equities August 2021 19 Source: Ministry of Education, Non-state education promotion law (draft for review), Special administrative measures for foreign investment (negative list) (2019 edition), Pre-school education law (Exposure draft), Opinions on further reducing the homework burden of students in compulsory education and the burden of afterschool training, HSBC Qianhai Securities Demographics ● Equities August 2021 Sub-sectors of vocational training Vocational training includes various sub-sectors with market cap in the hundreds of billions … …and most are highly fragmented Number of applicants and participation rates are the core drivers Civil service exam: high demand for training given popularity China’s gruelling civil service exams are known the world over. They are divided into two. There’s the national civil service exam, or guokao, which is the better-known and more soughtafter test that’s organized by the central government with the written test conducted in November and with interviews in February or March of the next year. There’s also the local civil service exams, known as provincial exams, organized by local governments and jointly conducted by most provinces, with the written test conducted during the Spring Festival and the interview in the summer every year. The big picture is that more and more college graduates are taking civil service exams as it can provide a safe career amid slowing economic growth and the challenging employment situation. The number of applicants has surged from 1.28m in 2016 to 1.51m in 2021 for the national exam and 3.67m in 2016 to 5.37m in 2021 for the provincial exam. The rapid growth of applicants has led to increasingly fierce competition with declining admission rates, which were just 2% and 3% for the national and provincial exam in 2021, respectively, resulting in rising demand for training. The number of civil servants recruited over the past five years has basically remained stable despite rising demand, with c26k national civil servants and 151k provincial civil servants in 2021. Still, we believe the numbers recruited could increase given: 1) much of China’s working population will start to retire in the next ten years, so central and local governments will face a shortage of civil servants and need to recruit new personnel; and 2) the proportion of civil servants in China (3.6%) is much lower than that of developed countries, such as the US (6.2%) and France (8.4%). As China continues to enhance public services, there is room for an increase in the number of government personnel. We estimate the 2025e training market for civil service exams to be worth RMB27bn, with a 2021-25e CAGR of c14%, driven by the increasing penetration rate. 20 Demographics ● Equities August 2021 Exhibit 28. Changes in the recruitment numbers of national civil servants (k/%) 30 90% 25 60% 20 30% 15 0% 10 5 -30% 0 -60% 2016 2017 2018 2019 2020 2021 Recruitment number of national civil servants YoY (RHS) Source: Offcn, Huatu, HSBC Qianhai Securities Exhibit 29. Changes in the recruitment numbers of provincial civil servants (k/%) 200 30% 150 20% 10% 100 0% 50 -10% 0 -20% 2016 2017 2018 2019 2020 2021 Recruitment number of provincial civil servants YoY (RHS) Source: Offcn, Huatu, HSBC Qianhai Securities Exhibit 30. Applicants and admission rates for national civil service exams (k/%) 2,000 3% 1,500 2% 2% 1,000 1% 500 1% 0 0% 2016 2017 2018 2019 2020 2021 Applicants number Admission rate (RHS) Source: Offcn, Huatu, HSBC Qianhai Securities Exhibit 31. Applicants and admission rates for provincial civil service exams (k/%) 6,000 4.5% 5,000 4.1% 4,000 3.7% 3,000 3.3% 2,000 1,000 2.9% 0 2.5% 2016 2017 2018 2019 2020 2021 Applicants number Admission rate (RHS) Source: Offcn, Huatu, HSBC Qianhai Securities The leaders Offcn Education and Huatu Education are the leaders in the training market for civil service exams. The former’s 2020 revenue from this segment was RMB6.29bn, and it took c45% of the market share. Other players in this sub-sector include: 1) small and medium-sized training institutions such as Daodan Education which has nearly 1,000 branches in 31 provinces nationwide; and 2) online education institutions such as Fenbi which has more than 48m users and is accelerating its offline expansion with 396 branches while also consolidating its online training business. 21 Demographics ● Equities August 2021 Exhibit 32. Civil service exams Offcn Education Huatu Education Fenbi Education Yaoguo Daodan Education Characteristics Teaching method Revenue Network A leader in civil service exam training, A focus on offline face-to-face teaching Revenue from the civil service exam 1,669 direct-sale outlets by end-2020 industry-leading R&D with a small proportion of online segment was RMB6.29b in 2020 training; contract class accounting for 70% of revenue A leader in civil service exam training A focus on offline face-to-face teaching Revenue from civil service exam More than 1,100 learning centres with offline teaching by famous with a small proportion of online segment was cRMB2-3bn in 2020 teachers training; contract class accounting for 50% of revenue, few types of contract class, lower prices and less refunds than Offcn A leader in online civil service exam Started out doing online teaching but Revenue in 2020 was cRMB4bn, As of January 2021, there were over training, spun off from Yuantiku in focus is now on offline face-to-face mainly from offline teaching 48m users in 396 branches, of which 2015, has a focus on online training teaching 7.03m were paid users and online teaching by famous teachers A focus on online courses Complete online teaching with a high Has provided services for more than price/performance ratio 7.5m civil service exam candidates Founded in 2016, obtained Series A A focus on offline teaching with two Revenue in 2020 was cRMB2bn with a Nearly 1,000 branches in 31 provinces funding (several hundred million RMB) major subjects: essays and interviews CAGR of more than 300% nationwide from New Oriental in March 2021 Source: Company data, Company website, Duozhi, HSBC Qianhai Securities Teacher recruitment exam: growth driven by policies Another popular exam is the teacher recruitment exam which includes written tests and interviews and is generally organized by the local education bureaus or the local human resources and social security bureaus. It’s usually held between March and August though it varies from region to region. Demand for recruiting teachers mainly comes from these drivers: (1) Retirement: There were about 15.5m full-time teachers in kindergartens, primary schools, middle schools and high schools in 2019. Based on an average working life of 33 years, there is now a shortage of c470k teachers caused by retirements every year. (2) Class size: The State Council has put forward a goal of keeping the proportion of large classes in compulsory education to within 5%, and completely eliminating super large classes with more than 66 students by 2020. This has reduced the teacher-to-student ratios in China’s primary and secondary schools and kindergartens and boosted demand for teachers. (3) Kindergartens: China has said by 2020 that the gross enrollment rate for three-year-old preschool children should reach 85%, and the coverage rate of kindergartens should reach 80%. That means the number of kindergartens will rise and increased demand for preschool teachers. They numbered c281k in 2019, with a 2015-19 CAGR of more than 5%. (4) Employment: In order to boost employment, China’s State Council plans to increase the recruitment of teachers in primary and secondary schools in 2020, especially those in high schools and kindergartens that are urgently needed, according to a press conference by the government on 28 February 2020. We estimate the training market for teacher recruitment exams to be cRMB23bn in 2025e with a 2021-25e CAGR of c21%, driven by the increasing number of applicants. 22 Demographics ● Equities August 2021 Exhibit 33. Changes in the number of schools at different levels 500 400 300 200 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Kindergarten Primary school Middle school High school Source: Ministry of Education, HSBC Qianhai Securities Exhibit 34. Growth in full-time teachers in China (m) 15 4% 11 3% 7 2% 3 1% -1 2014 2015 2016 2017 High school Middle school Primary school Source: Ministry of Education, HSBC Qianhai Securities 2018 Kindergarten 2019 0% YoY (RHS) Teaching is more attractive with an improved salary. In order to attract more talent into the education sector, China has increased teachers’ salaries. In accordance with Article 25 of the Teachers’ Law, the average salary of teachers should not be lower than that of national civil servants and will be gradually increased. According to www.gov.cn, the average salary of teachers for compulsory education in 97.6% of the counties nationwide is not lower than that of local civil servants as of September 2020. Exhibit 35. Salaries of education employees vs overall in urban non-private companies in China (thousands RMB) 120 100 80 67 62 60 40 20 2015 74 68 83 74 92 82 2016 2017 2018 Overall Education industry 91 98 2019 Source: National Bureau of Statistics, HSBC Qianhai Securities 23 Demographics ● Equities August 2021 A fragmented market First-tier training providers like Offcn Education and Huatu Education have strong advantages in R&D, teaching staff and marketing channels. For example, Offcn’s revenue from teacher recruitment exam training was RMB1,794m in 2020. Local training institutions above a certain size like Shanxiang Education and Cuour comprise second-tier institutions, though they still lag far behind tier-one institutions based on their limited geographical distribution and fewer products. Postgraduate entrance exams: increasing applicants The postgraduate entrance exam is organised by the Education Department, with written tests conducted at the end of December every year and interviews held in the spring of the next year. Enrollment: Since China began to expand enrollment in higher education from 2000, the enrollment numbers of graduate students has steadily increased, reaching 1.107m in 2020, up 72% from five years ago. The purpose of the expansion is to cultivate more professionals and ease the pressure on employment. In February 2020, the Ministry of Education announced that an additional 189k graduate students would be enrolled in 2020 to alleviate the employment pressure caused by the pandemic. Afterwards, the Ministry of Education proposed steadily expanding the enrollment of graduate students in its Opinions on Accelerating the Reform and Development of Graduate Education in the New Era. Applicants: The number of college graduates keeps rising, driven by the popularity of higher education in China, and is expected to reach 9.09m in 2021 according to the Ministry of Education, leading to greater job-hunting pressure for undergraduates. As a result, students have a strong desire to participate in postgraduate entrance exams in order to improve their employment appeal. The number of applicants for postgraduate entrance exam reached 3.41m in 2020, more than double from five years ago. The increasing number of applicants has made it more difficult to be admitted, with the registration to admission ratio rising from 2.6:1 in 2015 to 3.0:1 in 2020, which led to an increase in demand for training. We estimate the training market for postgraduate entrance exams to be cRMB31bn in 2025e with a 2021-25e CAGR of c19%, driven by increasing applicants and a rising penetration rate. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Exhibit 36. Enrollment number and registration to admission ratio for postgraduate entrance exams (m) 1.20 3.5 3.0 0.90 2.5 2.0 0.60 1.5 0.30 1.0 0.5 0.00 0.0 Enrollment number Registration to admission ratio (RHS) Source: Ministry of Education, HSBC Qianhai Securities Exhibit 37. Applicants for postgraduate entrance exams (m) 4.0 30% 3.0 20% 2.0 10% 1.0 0% 0.0 -10% Applicatns number YoY (RHS) Source: Ministry of Education, HSBC Qianhai Securities 24 Demographics ● Equities August 2021 Moving to a more concentrated market The market is relatively fragmented but likely will become more concentrated. There are two teaching models in this market: online and offline. National training companies like Wendu, Haiwen and Qihang, all have offered postgraduate entrance exams for over 10 years, mostly using direct sales and franchise sales, resulting in a wide coverage for their offline network. Meanwhile, Offcn Education rolled out a postgraduate entrance exam program in 2013 leveraging its thousands of self-owned schools, a strong teaching and research system and operational capacity. Online training institutions such as Koolearn, Hujiang and Kaochong have developed online training for postgraduate entrance exams. Covering both the low end and high end, Koolearn has launched a variety of courses featuring famous teachers with 2019 revenue from its university business at RMB641m. Focusing on medium and high-end markets, Hujiang has introduced training camp programs for the general courses as well as 1-on-1 tutoring and allsubject training camps for the professional courses. Kaochong has rolled out 1-on-1 high-end courses for the professional courses without any public courses and with a focus on the low-end market. Exhibit 38. Major companies in postgraduate entrance exam training market Form Offline Online Company Offcn Education Wendu Education Haiwen Kuakao Qihang Education Koolearn Hujiang Kaochong Characteristics Prices Network A leader in national civil service Face-to-face training ranges from RMB19,800 to RMB42,900 Uses the direct-sale method to exam training with a postgraduate Full-year training (all subjects) ranges from RMB32,800 to RMB72,800 operate all outlets with 1,335 entrance exam business as a Live streaming + face-to-face training ranges from RMB16,800 to RMB39,800 direct-sale branches and major segment too learning centres covering 319 cities in 31 provinces nationwide A focus on face-to-face teaching Training on weekend (RMB21,800), full-year training camp (RMB59,800) Uses the direct-sale method + and has a large number of famous franchises to operate its outlets teachers with a comprehensive with 30+ direct-sale institutions curriculum and 600+ cooperative institutions A national training institution for Standard training (RMB20,000-60,000), training for final round examination Uses the direct-sale method + postgraduate entrance exams with (RMB20,000) franchises to operate its outlets a focus on offline training with 236 direct-sale teaching centres and 14 franchised teaching centres. A focus on postgraduate entrance Full-year training (RMB80,000-90,000) Uses the direct-method sale + exams for cross-college, cross- franchises to operate its outlets major and cross-region and with two full-time teaching provides custom-made bases, six direct-sale branches personalised services and 100+ franchised branches Engaged in training and Full-course training costs from RMB990 to RMB2,500 per subject; The company takes the method registration of postgraduate VIP training costs from RMB2,990 to RMB7,000 per subject; live-streaming of direct-sale + franchise to entrance exams with three training costs from RMB5,800 to RMB6,800 per subject; operate its outlets with 200+ segments: Qihang School, Qihang specialized course 1-on-1 training costs from RMB14,000 to RMB20,000. franchised branches nationwide. Online and Qihang Books Leader in the teaching and training Training ranges from RMB3,569 to RMB25,580 industry covering K12, adult education and other categories A focus on the middle and high- Large-size classes, VIP contract classes and summer training camps by famous end market with a famous teacher teachers are charged from RMB950 to RMB7,000 per subject; team specialized course 1-on-1 training charged from RMB8,750 to RMB80,000. A focus on the low-end market and Standard training is charged from RMB899 to RMB1,999 per subject; standard emphasizes its high plus training is charged from RMB3,499 to RMB3,999 per subject; specialized price/performance ratio course 1-on-1 training is charged from RMB5,499 to RMB10,999. Source: Company website, HSBC Qianhai Securities 25 Demographics ● Equities August 2021 IT training: demand boosted by emerging industries With rapid growth in artificial intelligence, big data and other emerging technologies, many more IT jobs are being created. The Ministry of Industry and Information Technology says the number of IT employees increased from 4.18m in 2012 to 6.73m in 2019 and that number is likely to keep heading higher. According to the Talent Development Report of New Infrastructure Industry in 2020 released by Zhaopin, the shortage in core professionals in new infrastructure fields (including 5G, artificial intelligence and Internet of Things) is estimated to reach 4.17m in 2020. Therefore, it’s no surprise to find that salaries in the IT industry are growing more quickly than the average for all other industries. The higher salaries and large demand for IT staff is attracting talent keen to develop their careers in the IT industry through IT vocational training. Exhibit 39. Number of employees in the IT industry (m) 8 20% 6 16% 12% 4 8% 2 4% 0 0% 2012 2013 2014 2015 2016 2017 2018 2019 Number of employees YoY (RHS) Source: Ministry of Industry and Information Technology, HSBC Qianhai Securities Exhibit 40. Salary and its growth of employees in the IT industry (RMB/%) 100,000 20% 80,000 15% 60,000 10% 40,000 20,000 5% 0 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 IT industry All industries Growth rate of IT industry year on year (RHS) Growth rate of all industries year on year (RHS) Source: Wind, HSBC Qianhai Securities Market size According to Frost & Sullivan, China’s IT training market is expected to grow from RMB21.3bn in 2014 to RMB60.3bn in 2022e, with a CAGR of 14%, driven by: 1) the popularity of new technologies that are increasing demand for IT staff; 2) IT major students need training given a lack of employment skills; and 3) the government’s support for the IT training market. Exhibit 41. Market size for IT training (RMBbn/%) 450 400 350 300 250 200 150 100 72 50 0 2012 15% 83 20% 100 50% 27% 190 150 27042% 2013 2014 2015 2016 2017 Market size of IT training YoY (RHS) Source: Frost & Sullivan (cited from the prospectus of China East Education), HSBC Qianhai Securities 410 0.6 330 0.5 0.4 22% 24% 0.3 0.2 0.1 0 2018 2019 26 Demographics ● Equities August 2021 Fragmented industry Currently, China’s IT training industry is fragmented with the top five providers collectively taking just c5% market share. Leading large domestic companies include Tarena, Chuanzhiboke, Aura International and Feicui Education (acquired by Great Wall of Culture Group) whose market shares are all less than 5%. Exhibit 42. Market share for the IT training industry 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Tarena Chuanzhi Aura The Great education Wall of Culture Source: Company announcement, HSBC Qianhai Securities Exhibit 43. Comparison of revenue of major public companies in IT industry 2,000 80% 1,600 60% 1,200 40% 800 400 20% - 0% Tarena Chuanzhi Aura The Great education Wall of Culture Revenue Gross Margin (RHS) Source: Company announcement, HSBC Qianhai Securities Financial training: strong demand for this well-paid industry Financial training means financial exams which include the CFA (Chartered Financial Analyst), CPA (Certified Public Accountants), FRM (Financial Risk Management) and ACCA (Association of Chartered Certified Accountants). Finance and economic courses have a wide audience too as they are not only required courses for some professionals, but general courses are also popular. According to iResearch, there are about 15-20m financial employees in China. The drivers for growth in this market include: 1) China produces 2.5m economic and management major graduates every year, per iResearch, who are potential users of financial and accounting training; 2) the financial industry has high salaries so attracts many students; 3) local governments have unveiled preferential policies for holders of CFA, CPA and other certificates, including reducing or exempting personal income tax, additional points for residence permits and making it easier to settle or get children into local schools. This makes finance and accounting qualifications more attractive to college graduates; and 4) financial exams are fairly difficult and most candidates have full-time jobs with limited time to prepare for exams. Statistics shows that the total number of applicants for various financial exams reached 12.45m by 2020, up 136% compared to 2015. Among them, applicants for ACCA, CFA and CMA qualifications increased at a 26% CAGR in 2015-20, exceeding the average growth for all financial exams, due to their high value and recognition. 27 Demographics ● Equities August 2021 Exhibit 44. Changes in applicants number of various financial exams (m/%) 14 12 10.51 11.72 12.45 30% 28% 10 8 6 5.26 6.31 7.68 26% 24% 4 2 22% 0 20% 2015 2016 2017 2018 2019 2020 Qualification of accounting Tax accountant Participation rate (RHS) Bank/securities/funds/futures ACCA/CFA/CMA CPA Others Source: iResearch Consulting, Ucfo, CFA Institute, CICPA, HSBC Qianhai Securities According to iResearch, the total market size for various financial trainings in 2020 was cRMB15bn and is expected to reach RMB28.1bn in 2023e, with a 2021-23e CAGR of more than 20%. Exhibit 45. Changes in market size and growth of the training industry for financial qualification exams (RMBbn/%) 30 70% 25 60% 20 50% 40% 15 30% 10 20% 5 10% 0 0% 2015 2016 2017 2018 2019 2020 2021e 2022e 2023e Market size YoY (RHS) Source: iResearch Consulting, HSBC Qianhai Securities 28 Demographics ● Equities August 2021 Company section 29 Demographics ● Equities August 2021 Offcn Edu (002607 CH) A vocational education leader, especially in civil servant exams Relatively strong R&D, faculty, marketing channels and brand Maintain Buy and target price of RMB21.20 Offcn Education is a leading vocational education provider with a focus on offering training for civil service exams (45% market share in 2020), public institution exams and teacher recruitment. It also has new divisions like training up graduates to take admission tests for corporate jobs and IT training. As a result, Offcn Education serves college students and job seekers aged 18-45 and offers more than 100 lines of different training products. In our view, it has four key strengths: strong R&D, faculty staff, selling channels and a solid brand. R&D A large R&D team with a standardized R&D process To ensure its teaching materials and digital delivery stay up-to-date, Offcn Education spent RMB1.051bn on R&D last year, equivalent to almost 10% of its revenue, to develop curriculums and digital infrastructure. At the end of 2020, Offcn had more than 3,000 R&D employees. It has 11 specialized research divisions and 31 local research institutes. These develop curriculums for everyday learning activities, including course design, course content, teaching methods and lecture notes. It also has one IT centre for training assistant software. Offcn Education’s headquarters is home to most curriculum R&D employees, with a small group working in provincial branches. After reviews and approvals, new products are used at local branches. Offcn’s R&D involves six steps: project approval, R&D, review and acceptance, small-scale testing, large-scale testing and overall evaluation. The is undertaken by Offcn’s specialized research institutes and other training-related divisions that provide support and cooperate with these institutes, based on their specific needs. 30 Demographics ● Equities August 2021 Exhibit 46. Structure of Offcn’s R&D system Head of R&D Deans of 11 specialized research institutes for vocational tests, interviews and essay writing General president of local research institutes Deans of 31 local research institutes Project group 1 Project group…… Project manager Research staff Source: Company announcements, HSBC Qianhai Securities Head of information technology center Project group 2 Project group…… Developing manager Product personnel, system interactive personnel, architects Exhibit 47. Offcn’s R&D expense and R&D expense ratio (RMBm/%) 1,200 1,000 800 600 400 200 0 2015 2016 2017 2018 2019 2020 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% R&D expense R&D expense ratio (RHS) Source: Company announcements, HSBC Qianhai Securities Exhibit 48. Number and average salary of Offcn’s R&D employees (people/RMB) 350,000 3500 300,000 3000 250,000 2500 200,000 2000 150,000 1500 100,000 1000 50,000 500 0 0 2015 2016 2017 2018 2019 2020 Number of R&D employees (RHS) Average salary of R&D employees Source: Company announcements, HSBC Qianhai Securities Quick and smart responses to customer needs Offcn has a nationwide network of directly-operated branches. Besides student enrollments, these branches also collect information to capture the needs of potential customers so that Offcn’s R&D division can quickly launch new courses based on this information. The company is able to identify business opportunities in lower-tier markets and respond in 24 hours. The same content may be used in different exams or textbooks. Therefore, Offcn can make breakthroughs in new areas by reusing teaching materials. 31 Demographics ● Equities August 2021 Faculty: Standardized teacher management system A fast-growing faculty The number of Offcn’s teachers has been increasing quickly at a CAGR of 50% in 2015-20, and even up 40% to 18.9k during the COVID-19 pandemic in 2020. As its faculty grows, the share of less-experienced teachers gradually increases with those working at Offcn for less than one year representing 63% of the faculty in 2017 vs. 43% in 2015. In addition, Offcn’s employee turnover rate dropped to 21% in 2017 from 26% in 2015, lower than the sector average. Standardized teacher training system to ensure teaching quality Each Offcn teacher is responsible for a specific course. This improves the efficiency of training new teachers, and means they complete their training in a relatively short period of time. It also reduces the company’s reliance on specific teachers. Offcn’s new teachers mainly come from campus recruitment at colleges and higher academic degrees. To ensure the professionalism of its faculty, Offcn develops a strict training and performance appraisal system. Every new teacher receives specialized training for 2-3 months, with experienced teachers as their mentors. After the training, these new teachers face strict assessments and will not be allowed to teach if they fail the assessment. When they begin teaching, all teachers have two promotion opportunities every year. Exhibit 49. Faculty breakdown, by years of teaching at Offcn 7500 Exhibit 50. Number of Offcn’s teachers (people/%) 20,000 75% 6000 16,000 60% 4500 12,000 45% 3000 8,000 30% 1500 0 2015 2016 2017 2018.4 <1 1-3 >3 Source: Company announcements, HSBC Qianhai Securities 4,000 15% 0 0% 2015 2016 2017 2018 2019 2020 Number of Offcn's teachers YoY (RHS) Source: Company announcements, HSBC Qianhai Securities Exhibit 51. Offcn’s teacher turnover rate 1000 30% 800 20% 600 400 10% 200 0 0% 2015 2016 2017 Dimission Turnover rate Source: Company announcements, HSBC Qianhai Securities Exhibit 52. Offcn’s faculty breakdown, by academic degrees 66, 0% 3904, 21% 2816, 15% 12288, 64% Graduate Higher vocational school Undergraduate Secondary vocational school Source: Company announcements, HSBC Qianhai Securities 32 Demographics ● Equities August 2021 Extensive selling channels and penetrating into lower-tier markets Directly-operated branches across the country As of 2020, Offcn has 1,669 directly-operated branches and study centres in 319 cities, covering all 31 provincial-level regions in China. This compares to more than c1,100 branches by Huatu Education, Offcn’s major competitor. Offcn’s branches are evenly distributed across China with East China as the largest revenue contributor (24%). Headquarters manage branches via a vertically-integrated system Offcn has four administrative levels: headquarters, regions, provinces and cities. The headquarters hold all administrative responsibilities and manage teaching and researching work, local schools and financial affairs for the various administrative levels, and so effectively control the teaching quality of Offcn’s branches and ensures profits flow from branches to the headquarters. Responsibilities for provincial-level branches include recruiting and training teachers and sales staff. Directly-operated schools in cities are responsible for sales, student enrollment and teaching. Compared to competitors, Offcn’s headquarters have more power and manage local branches more strictly. Offcn has developed a vertically-integrated system for quick and high-frequency responses. It has also built an internal digital platform to improve management efficiency. This enables Offcn to exchange data between its front and back office daily, which helps the company identify customer needs for training more quickly than competitors and quickly launch teaching products. Exhibit 53. Offcn’s revenue breakdown, by region (2020) 0.57% 11.28% 14.06% 12.53% 9.07% 16.74% 12.05% 23.70% Northeast South North Southwest East Northwest Source: Company announcements, HSBC Qianhai Securities Central Other Exhibit 54. Number of Offcn’s branches and revenue per branch (RMBm) 1800 12 1500 9 1200 900 6 600 3 300 0 0 2015 2016 2017 2018 2019 2020 Number of branches revenue per branch (RHS) Source: Company announcements, HSBC Qianhai Securities Brand: A first-mover advantage with a good reputation Brand equity built on a strong history Offcn’s 20 years of exam preparation and training has helped it build strong brand equity. Founded by Mr. Li Yongxin and others in 1999, the company began to test the water in the Mathematical Olympiad (the World Championship Mathematics Competition for High School students) and college entrance exam training market in 2000. In 2001, Offcn launched a training course for college students taking the admission test for Peking University’s Master of Public Administration program. It also expanded into the civil servant exam training market the same year, becoming one of the first movers among domestic exam training providers. In 2002, offcn.com, the first civil servant exam training website in China, launched. The company 33 Demographics ● Equities August 2021 became a strategic partner of the People’s Daily in 2004 and published the first set of reference books applicable to civil servant exams in China. In 2007, Offcn became the first domestic training company providing special courses for job interviews and established its business model consisting of face-to-face teaching, books and online courses. In 2019, Offcn went public via a back-door listing with Yaxia Auto being the shell company. Reputation and publicity Offcn’s sales mainly depend on its offline reputation and publicity, with a relatively low reliance on advertising. Therefore, Offcn’s total selling expenses are lower than peers and are mainly employee salaries, with marketing and promotion expenses (including advertising) accounting for less than 20% of its selling expenses. In the offline market, Offcn mainly depends on: 1) word of mouth referrals, which are its most important offline sales channel; and 2) campus marketing as Offcn works closely with student employment centres, student affair departments, student unions and various student associations in colleges to help publicise Offcn’s products, service and brands. Exhibit 55. Selling expense ratio comparison (%) 90 80 K12 tutoring offline K12 turtoring online Vocational education 70 60 50 40 30 20 10 0 TAL New Oriental GSX Techedu Koolearn Offcn Education China East Education Chuanzhi Education 2016 2017 2018 2019 Source: Company announcements, HSBC Qianhai Securities estimates Tarena Exhibit 56. Breakdown of Offcn’s selling expenses, 2020 1% 6% 10% 15% 68% Exhibit 57. Breakdown of Offcn’s selling expenses, 2019 0% 5% 8% 20% 67% Payrolls Rent、D&A Others Marketing expense Traveling expense Source: Company announcements, HSBC Qianhai Securities Payrolls Rent、D&A Others Marketing expense Traveling expense Source: Company announcements, HSBC Qianhai Securities 34 Demographics ● Equities August 2021 Sensitivity analysis of earnings We conduct a sensitivity analysis on 2021e attributable net profit. If 2021e revenue is 5% higher than our estimate, attributable net profit would be 13.7% higher than our base case estimate. If 2021e operating cost is 5% higher than our estimate, attributable net profit would be 8.8% lower than our base case estimate. Exhibit 58. Sensitivity analysis of 2021e attributable net profit _________________________ 2021e revenue change __________________________ -10% -5% 0% 5% 10% -10% 2021e cost -5% change 0 5% 10% Source: HSBC Qianhai Securities estimates -9.9% -18.7% -27.5% -36.3% -45.1% 3.9% -4.9% -13.7% -22.5% -31.4% 17.6% 8.8% 0.0% -8.8% -17.6% 31.4% 22.5% 13.7% 4.9% -3.9% 45.1% 36.3% 27.5% 18.7% 9.9% Valuation and risks We continue to use a PE multiple to value this stock (see Offcn Edu: We expect earnings to recover in 2H21e, 21 July 2021). We estimate the firm’s 2020-23e net profit will grow at a CAGR of 28% (unchanged), vs 41% in 2018-20e. We continue to use 46x 2021e PE to value the stock, which is 1SD below the historical average (unchanged). Based on 2021e EPS of RMB0.46 (unchanged), we arrive at our TP of RMB21.20 (unchanged). Our TP implies c86% upside; accordingly, we maintain our Buy rating on the stock. We estimate the firm’s 2021-23e net profit CAGR to be 30%, higher than the average (24%) of comparable vocational education companies. As such, a certain valuation premium compared to that of its peers (average 28x 2021e PE) is justified, in our view. Potential share price catalysts: Higher profit margin thanks to optimised labour costs, success in graduate entrance training, IT and other new businesses. Exhibit 59. Offcn Education’s PE band 70 60 50 40 30 20 10 0 Max 98x +1 SD 80x Avg 63x -1 SD 46x Min 25x Source: Wind, HSBC Qianhai Securities 35 Demographics ● Equities August 2021 Key downside risks: Regulations expanded into recruitment exam training industry: Since early 2021, regulations applicable to the K12 training industry have been implemented. If the scope of regulations expands into the recruitment training industry, enrollment, teaching and network building of the firm will be adversely affected. Deteriorating competitive environment: The business scope of the K12 training industry could be adjusted due to regulations. If these institutions enter the area of training for civil service exams and top-up degree programme admissions, the competition will intensify. Lower profit margin due to higher labour costs: In order to expand its business and compete in the industry, the firm raises the salaries for its teachers. Any significant increase in labour costs would result in a decline in profit margin, impacting its net profit growth. 36 Demographics ● Equities August 2021 Financials & valuation: Offcn Edu Financial statements Year to 12/2020a Profit & loss summary (CNYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC Qianhai PBT Taxation Net profit HSBC Qianhai net profit 11,202 2,644 -164 2,480 -431 2,661 2,661 -357 2,304 2,304 Cash flow summary (CNYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 3,370 -1,325 1,081 -1,488 -2,117 2,045 Balance sheet summary (CNYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders’ funds Invested capital 426 1,827 9,423 5,950 14,419 6,020 3,976 -1,974 4,275 3,432 12/2021e 14,005 3,337 -113 3,224 -138 3,286 3,286 -447 2,839 2,839 3,455 -415 -1,211 -2,003 -241 3,040 420 2,136 9,376 6,191 15,533 6,258 3,976 -2,215 5,112 5,745 12/2022e 17,798 4,351 -128 4,224 -129 4,295 4,295 -584 3,711 3,711 4,622 -415 -344 -2,618 -1,661 4,207 414 2,429 11,900 7,853 18,344 7,928 3,976 -3,877 6,205 5,945 12/2023e 22,466 5,609 -142 5,466 -109 5,557 5,557 -756 4,801 4,801 5,901 -415 -324 -3,387 -2,190 5,486 408 2,707 15,152 10,043 21,868 9,980 3,976 -6,067 7,620 6,114 Ratio, growth and per share analysis Year to 12/2020a 12/2021e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC Qianhai EPS 22.1 25.0 20.7 26.2 22.3 30.0 27.4 23.5 27.7 23.2 Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CNY) 2.6 3.1 50.5 61.1 59.8 60.5 18.9 19.0 23.6 23.8 22.1 23.0 6.1 24.2 -46.2 -43.3 -0.7 -0.7 EPS Rep (diluted) HSBC Qianhai EPS (diluted) DPS Book value 0.37 0.46 0.37 0.46 0.24 0.32 0.69 0.83 12/2022e 27.1 30.4 31.0 30.7 30.7 3.0 62.7 65.6 21.9 24.4 23.7 33.8 -62.5 -0.9 0.60 0.60 0.42 1.01 12/2023e 26.2 28.9 29.4 29.4 29.4 3.7 78.6 69.5 23.9 25.0 24.3 51.3 -79.6 -1.1 0.78 0.78 0.55 1.24 Valuation data Year to 12/2020a EV/sales 6.1 EV/EBITDA 25.8 EV/IC 19.9 PE* 30.5 PB 16.4 FCF yield (%) 2.9 Dividend yield (%) 2.1 * Based on HSBC Qianhai EPS (diluted) 12/2021e 4.9 20.4 11.9 24.8 13.8 4.3 2.8 12/2022e 3.7 15.3 11.2 18.9 11.3 6.0 3.7 Buy 12/2023e 2.9 11.5 10.5 14.6 9.2 7.8 4.8 ESG metrics Environmental Indicators 12/2020a GHG emission intensity* n/a Energy intensity* n/a CO2 reduction policy n/a Social Indicators 12/2020a Employee costs as % of revenues 27.5 Employee turnover (%) n/a Diversity policy n/a Governance Indicators 12/2020a No. of board members 7 Average board tenure (years) 2.0 Female board members (%) 28.6 Board members independence (%) 42.9 Source: Company data, HSBC Qianhai Securities * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Issuer information Share price (CNY) Target price (CNY) RIC (Equity) Bloomberg (Equity) Market cap (USDm) 11.40 21.20 002607.SZ 002607 CH 10,844 Free float Sector Country/Region Analyst Contact 26% IT Services China Jing Han +86 10 5795 2344 Price relative 42.30 32.30 22.30 12.30 2.30 2019 2020 Offcn Edu Source: HSBC Qianhai Securities Note: Priced at close of 06 Aug 2021 2021 Rel to CSI 300 Index 42.30 32.30 22.30 12.30 2.30 37 Demographics ● Equities August 2021 Chuanzhiboke (003032 CH) A focus on teaching and research Winning customers at a low cost thanks to good reputation Initiate at Buy with target price of RMB35.30 An education enterprise focused on IT training Founded in 2006, Chuanzhiboke provides IT education and training through self-developed courses. First, a bit of background. Chuanzhiboke’s revenue grew steadily in 2017-19 at CAGR of 15%, though it fell 31% y-o-y in 2020 given COVID-19 hindered its offline training business. It was a similar story for profit, which fell even more last year (see Exhibit 57), but we expect 2023e net profit to rebound to RMB300m with a 2021-23e CAGR of 27%. Exhibit 60. Chuanzhiboke: revenue and y-o-y growth (RMBm/%) 1,600 60% 1,200 35% 800 10% 400 -15% Exhibit 61. Chuanzhiboke: net profit and y-o-y growth (RMBm/%) 400 240% 300 160% 200 80% 100 0% 0 -40% 0 -80% Revenue YoY (RHS) Source: Company announcement, HSBC Qianhai Securities estimates Net profit YoY (RHS) Source: Company announcement, HSBC Qianhai Securities estimates 38 Demographics ● Equities August 2021 Exhibit 62. Chuanzhiboke: net cash flow from operating activities (RMBm) 400 300 200 100 0 2017 2018 2019 2020 2021e 2022e 2023e Source: Company announcement, HSBC Qianhai Securities estimates Exhibit 63. Chuanzhiboke: gross profit margin 51% 50% 49% 48% 47% 46% 45% 44% 2017 2018 2019 2020 2021e 2022e 2023e Source: Company announcement, HSBC Qianhai Securities estimates Chuanzhiboke’s main businesses includes: 1. Short-term on-site IT training: On-site training under the brand Dark Horse Programmer usually lasts 4-6 months and is provided to college graduates or trainees who need to improve their IT skills. This is Chuanzhiboke’s major source of revenue (82% to 97% in 2017 to 2020) and it has two types: 1) IT subject training which includes server-end IT courses (Python and JavaEE) and mobile-end/front-end IT courses; and 2) pan-IT subject training which includes product manager and design courses (UI design and visual design), e-commerce and new media courses (e-commerce and Taobao e-commerce). 2. Online training: Online education is provided under the brand Bo Xue Gu. 3. Non-academic higher education IT training: Chuanzhiboke worked with state-owned universities to provide 1-3 year courses to cultivate practical IT professionals for students who graduate from high school. This program will cultivate their IT skills and grant them academic degrees. 4. Children’s training: including children’s painting and programming training. Short-term on-site training has face-to-face training and also so-called dual training which refers to the production of teaching videos by top instructors and then on-site teaching by instructors with rich experience in front-line learning development. Exhibit 64. Chuanzhiboke: revenue breakdown by segments (RMBm) 1,600 1,200 800 400 0 2017 2018 2019 Short-term on-site/online training Source: Company announcement, HSBC Qianhai Securities 2020 2021e 2022e 2023e IT non-academic advanced education Ohters 39 Demographics ● Equities August 2021 Exhibit 65. Courses’ mix of short-term IT training 100% 80% 60% 40% 20% 0% 2017 2018 2019 2020H1 Others E-commerce and new media courses Product manager and design courses Front end/ mobile IT course Server-side IT courses Source: Company announcement, HSBC Qianhai Securities Exhibit 66. Teaching models of short-term IT training 100% 80% 60% 40% 20% 0% 2017 2018 2019 2020H1 face-to-face training dual training Source: Company announcement, HSBC Qianhai Securities Competitiveness: Strong reputation with high-quality teaching High-quality courses improve the employment rate and salaries of trainees Chuanzhiboke’s courses lean towards practical training. For example, its JavaEE course is divided into two stages: technical and project stages. At the technical stage, the basic grammar and programming principles of the Java language are taught. At the project stage, trainees gain experience with eight practical projects which cover various applications like logistics, e-commerce and social applications. The course’s duration is four to six months and split into several modules, each of which has a dedicated instructor. This modular teaching style enables the instructor to focus on just one module, can help update the course content quickly and keep up with the changes in the market. According to the company’s prospectus, the employment rate of trainees with secondary and tertiary education and below who have received short-term on-site training is 90.66%. The employment rate for trainees of its new media training (see Exhibit 63) stood at c97% in 2019, with an average salary of RMB9k, RMB2k higher than that of peers, according to the company’s data. Exhibit 67. Chuanzhiboke: Training projects Subject JavaEE Type of class Master class HTML&JS + front-end Master class Python + big data development Master class Artificial intelligence development UI/UE design Employment class Master class Software testing Employment class New media + short video + live streaming operations Source: Company website, HSBC Qianhai Securities Employment class City Tier-1 cities Other cities Tier-1 cities Other cities Tier-1 cities Other cities Tier-1 cities Tier-1 cities Other cities Tier-1 cities Other cities Tier-1 cities Tuition RMB22,980 RMB20,980 RMB22,980 RMB20,980 RMB24,980 RMB22,980 RMB22,980 RMB17,980 RMB15,980 RMB18,980 RMB16,980 RMB14,980 40 Demographics ● Equities August 2021 Attracts staff with high salaries based on quality teaching and research investment Chuanzhiboke had 1,652 employees in 2020, with 65% as teaching and research personnel. According to the company’s website, 58% of these personnel have worked at industrial giants such as Huawei, Alibaba and Tencent before. The instructors should have two kinds of abilities. One is the practical technical ability, referring to an instructor’s practical project development experience; the other is a strong ability to listen and express themselves clearly. Before starting to teach, instructors are required to receive standardised assessments and pass the simulation test which is scored by trainees. Exhibit 68. Chuanzhiboke: Number of employees 3000 2500 2042 2000 1500 1000 500 0 2017 2308 2018 2393 2019 1975 2020 Source: Company announcement, HSBC Qianhai Securities Exhibit 69. Chuanzhiboke: Mix of employees 3.4% 10.0% 22.3% 64.3% Teaching and R&D Functional management Marketing Finance Source: Company announcement, HSBC Qianhai Securities In 2019, the per capita annual salary of Chuanzhiboke’s teaching and R&D personnel was RMB231k and RMB286k, respectively. According to 51job.com, the company is looking for instructors in Beijing who can earn up to RMB80k a month. The company’s salary is not only at the high end in the IT training industry, but appealing even when compared to Internet giants, and therefor conducive to attracting high-end professionals to join. Exhibit 70. Chuanzhiboke: per capita annual salary (RMBk) 400 300 200 100 0 2017 2018 2019 Teaching personnel R&D personnel Source: Company announcement, HSBC Qianhai Securities Exhibit 71. Chuanzhiboke: monthly salary of instructors in Beijing (RMBk) UI/UE live steaming operation JavaEE dual training JavaEE regular 0 10 20 30 40 50 60 70 80 90 Source: 51job, HSBC Qianhai Securities 41 Demographics ● Equities August 2021 Word-of-mouth marketing to ensure winning customers at low cost Chuanzhiboke’s trainees are mainly acquired by recommendations from former trainees as 70% were gained in this way by the end of 2020. Other methods include leveraging its reputation with colleges and network marketing. Word-of-mouth marketing Chuanzhiboke acquires customers mainly through word-of-mouth marketing. It has obtained a good reputation in colleges thanks to its teaching quality and curriculum. Cooperation with colleges Chuanzhiboke has solid relationships with colleges as it provides teaching resources, training services and other support. It has improved its reputation and influence by cooperating with more than 1,900 colleges in curriculum content and teaching support, and with 580 colleges in employment training. Meanwhile, the company has published 99 textbooks and issued 2.77m books. Network marketing Chuanzhiboke has improved its reputation with industry forums, new media and other network channels, and is more cautious about online advertising compared with its peers. Chuanzhiboke’s selling expense ratio was c10%, lower than peers (20-50%), while its promotion expenses only accounted for c35% of its selling expenses. Its cost of acquiring customers is lower than that of peers due to efficient promotions based on its good reputation. Exhibit 72. Selling expense ratio of IT training companies 60% 40% 20% 0% 2016 2017 2018 2019 Chuanzhi education China East Edu Tarena Aura Source: Company announcement, HSBC Qianhai Securities Exhibit 73. Chuanzhiboke: mix of selling expense 100% 80% 60% 40% 20% 0% 2017 2018 2019 2020H1 Payrolls Marketing Others Source: Company announcement, HSBC Qianhai Securities Exhibit 74. Comparison of costs of acquiring customers in IT training industry (RMB) 7000 6000 4908 5000 3622 4000 3000 2050 2000 5538 4013 1638 6463 4994 2000 5383 4574 2881 5699 4028 4001 1000 0 2016 2017 2018 2019 2020 Chuanzhi Education Tarena China East Education Source: Company announcement, HSBC Qianhai Securities estimates 42 Demographics ● Equities August 2021 Drivers of growth: expansion of network and categories Expand network Chuanzhiboke has teaching centres in 19 cities nationwide including Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu and Wuhan. The company leases these teaching centres and their size is 10k sqm in Beijing and Shanghai and several thousand sqm elsewhere. After two to three years of operations in a new city, Chuanzhiboke can expand its leasing area based on operations. Chuanzhiboke plans to expand five of its existing teaching centres (including Shanghai and Shenzhen) and build six new teaching centres (including Qingdao and Nanchang) to develop its IT vocational training projects within two years after its listing. Once completed, this should increase its capacity to 30,587 trainees per year. Exhibit 75. Chuanzhiboke: expansion and newly-built teaching centre plans City Shanghai Shenzhen Zhengzhou Wuhan Xi’an Nanchang Qingdao Nanning Kunming Guizhou Lanzhou Source: Company announcement, HSBC Qianhai Securities Type Expansion Expansion Expansion Expansion Expansion Newly-built Newly-built Newly-built Newly-built Newly-built Newly-built Time 1st year 1st year 1st year 2nd year 2nd year 1st year 1st year 1st year 2nd year 2nd year 2nd year Area (sqm) 11400 6200 4000 3400 1800 3000 3000 3000 3000 3000 3000 Rollout of non-academic higher education training Chuanzhi Specialized College has rolled out non-academic higher education training for IT skills teaching for high-school graduates, and jointly launched a business model that combines skills and an academic degree with state-owned universities with a focus on computer application technology and five subjects including Java, Python and digital media art. Chuanzhiboke has also started Chuanzhi Podcast College by cooperating with Shanghai Open University which is responsible for enrollments and teaching, while Chuanzhiboke designs and develops the curriculum, and assists in enrollment and teaching. Students of Chuanzhi Podcast College can obtain graduation and degree certificates after completing all courses and meeting relevant requirements. In addition, Chuanzhiboke plans to build an IT training institute in Suqian, Jiangsu Province, for RMB112m over two years. The projects include new curriculum development, a cloud computing platform, a national programming plan and children’s programming. National programming plan This is an independent programming learning platform for all ages by which participants master programming languages such as Java, Python and C++ by playing games. This project will be open to potential customers who are interested in programming, and which is expected to drive growth in its online education and short-term training business. Children’s programming platform This program teaches children to control cars, trains and unmanned aerial vehicles using programming. Chuanzhiboke will continue to explore internet programming to solve crossdiscipline problems by launching courses in maths, foreign languages, arts and crafts in the future. 43 Demographics ● Equities August 2021 Initiate at Buy with target price of RMB35.30 We estimate Chuanzhiboke’s 2021-23e net profit to be RMB192m, RMB250m and RMB308m, up 196%, 30% and 23% y-o-y, respectively, with a 2021-23e CAGR of 27%. Revenue comes from these three segments: Short-term online/offline training: Chuanzhiboke’s revenue growth is driven by the expansion of training centres given strong demand for IT training. The revenue from this segment decreased 32% in 2020 due to the epidemic. We expect the 2021-23e revenue of this segment to increase 68%/26%/20% to RMB998m/RMB1,257m/RMB1,509m, respectively. Non-academic higher education IT training: The increase in IT training participation has driven rapid revenue growth for this segment. While revenue for this segment fell 5% in 2020 we expect 2021-23e revenue to increase 27%/22%/18% to RMB43m/RMB52m/RMB61m, respectively. Other income: This segment refers to Chuanzhiboke’s other types of training. Revenue for this segment increased 33% in 2020 and we expect 2021-23e revenue to increase 23%/18%/15% to RMB15m/RMB18m/RMB20m, respectively. Gross profit margin: Operating costs include employee remuneration and lease expenses. Given expansion and an increasing number of trainees, we expect the 2021-23e proportion of employee remuneration of revenue to decrease to 38.2%/37.8%/37.5%, and the 2021-23e proportion of lease expense to decrease to 7.9%/7.8%/7.6%. Meanwhile, we expect the company’s property utility charges and depreciation as well as other costs to increase given the expansion, but the ratios will stay unchanged with property utilities charges and depreciation at 4.0%, other expenses of 1.1% and other business costs of 21% in 2021-23e. As a result, we expect the 2021-23e overall gross profit margin to be 49%/50%/50%. Expenses ratios: 1) Selling expenses. This includes remuneration of sales personnel and marketing expenses and we expect the 2021-23e ratio to be 13%/13%/13%, respectively. 2) Administration expenses: We expect the 2021-23e ratio to be 11%/11%/11%, respectively. 3) R&D expenses: This includes R&D investment in teaching and research as well as online systems. We expect the 2021-23e ratios to be 7%/7%/7%, respectively. Exhibit 76. Chuanzhiboke: revenue and earnings estimates Revenue (RMBm) Short-term online/offline training Non-academic higher education IT training Other Total 2020 2021e 594 998 34 43 12 15 640 1055 Y-o-y growth Short-term online/offline training -32% 68% Non-academic higher education IT training -5% 27% Other 33% 23% Total -31% 65% Source: Company announcement, HSBC Qianhai Securities estimates 2022e 1257 52 18 1327 26% 22% 18% 26% 2023e 1509 61 20 1590 20% 18% 15% 20% 44 Demographics ● Equities August 2021 Exhibit 77. Chuanzhiboke: gross profit margin, expense ratio and net profit estimates Operating costs to revenue ratios Employees’ remuneration Lease expense Property utilities charges and depreciation & amortisation Other expenses Other business costs Blended gross margin 2020 2021e 2022e 2023e 39% 38% 38% 38% 10% 8% 8% 8% 5% 4% 4% 4% 1% 1% 1% 1% 21% 21% 21% 21% 45% 49% 50% 50% Selling expense ratio Administrative expense ratio R&D expense ratio Net profit (RMBm) Y-o-y growth Source: Company announcement, HSBC Qianhai Securities estimates 16% 13% 13% 13% 12% 11% 11% 10% 12% 7% 7% 7% 65 192 250 308 -64% 196% 30% 23% Exhibit 78. Chuanzhiboke: income statement estimates (RMBm) Revenue Operating cost Selling expense Administrative expense R&D expense Financial expense Total operating costs Other income Investment income Credit impairment Asset impairment Operating profit Income tax Net profit Minority Net profit attributable to parent company 2018 791.45 427.71 74.50 89.71 41.69 (2.86) 634.01 0 12 0 -8.58 160.93 25.77 169.80 - 169.80 Source: Wind, HSBC Qianhai Securities estimates 2019 923.67 468.06 122.45 99.95 64.33 (1.01) 756.98 0 18.72 -2.22 0 183.23 22.19 180.27 - 180.27 2020 639.62 352.07 105.42 75.09 74.19 (7.82) 599.18 0 9.29 -1.91 -5.29 42.75 (1.12) 65.08 - 65.08 2021e 1,055.30 535.78 139.30 113.97 73.87 (10.15) 859.11 196.19 23.78 192.41 - 192.41 2022e 1,326.78 667.42 172.48 140.64 90.22 (13.36) 1,065.36 261.42 30.96 250.47 - 250.47 2023e 1,590.21 792.34 206.73 165.38 106.54 (16.37) 1,264.17 326.04 38.06 307.98 - 307.98 The company has a high proportion of cash, which accounted for 75% of its total assets in 2020, and we expect that proportion to be maintained in 2021-23e. The company has a small amount of tuition owed by its customers with accounts receivable accounting for less than 1% of its total assets, as its trainees are mostly individuals. In addition, the company has no inventory. Chuanzhiboke is an asset-light company with leased training venues. The proportion of the company’s fixed assets in total assets in 2020 is less than 1%, and we expect it to be unchanged in 2021-23e. The company has little debt given no interest-bearing liabilities, but has a relatively high proportion of advances arising from the advance collection of tuitions. The company’s assetliability ratio was 23% in 2020, and we expect it unchanged in 2021-23e. 45 Demographics ● Equities August 2021 Exhibit 79. Chuanzhiboke: balance sheet estimates (RMBm) Cash Accounts receivable Prepayments Total current assets Fixed assets Intangible assets Total non-current assets Total assets Short-term loans Accounts payable Advances from customers Total current liabilities Long-term loans Long-term operating liabilities Total non-current liabilities Total liabilities Share capital Capital reserve Retained income Total shareholders’ equity Source: Wind, HSBC Qianhai Securities estimates 2018 766.27 8.88 9.20 784.91 4.62 45.31 155.23 940.14 111.80 233.86 345.66 345.66 362.20 10.48 221.81 594.49 2019 882.12 10.43 10.60 916.56 4.98 64.94 205.65 1,122.21 128.06 215.23 343.29 343.29 362.20 16.83 399.89 778.92 2020 836.95 9.66 9.37 869.23 3.29 60.16 241.78 1,111.01 85.03 175.64 260.67 260.66 362.20 23.18 464.96 850.34 2021e 1,192.06 11.61 13.93 1,234.48 18.19 81.14 235.06 1,469.54 129.40 282.50 411.90 16.07 16.07 427.98 362.20 23.18 656.18 1,041.56 2022e 1,480.51 14.59 16.69 1,533.02 47.28 110.85 293.86 1,826.88 161.19 355.18 516.37 20.02 20.02 536.39 362.20 23.18 905.11 1,290.49 2023e 1,793.00 17.49 18.22 1,854.16 84.92 162.60 383.24 2,237.41 191.36 425.70 617.06 23.77 23.77 640.83 362.20 23.18 1,211.19 1,596.57 Operating cash outflow in 2020 was cRMB27m, dented by the epidemic, but we expect 202123e operating cash flow to turn positive to RMB329m/RMB337m/RMB403m. Capital expenditure in 2020 was just RMB14m due to its asset-light model, and we expect 2021-23e capital expenditure to be at low levels of RMB45m/RMB80m/RMB125m, respectively. Free cash flow to equity in 2020 was RMB-40m, and we expect the 2021-23e free cash flow to equity to be RMB284m/RMB257m/RMB278m. Exhibit 80. Chuanzhiboke: cash flow statement estimates (RMBm) Net cash flow from operating activities Capital expenditure Net cash flow from investing activities Free cash flow to equity Source: Wind, HSBC Qianhai Securities estimates 2018 2019 2020 2021e 472 141 -27 329 -28 -37 -14 -45 -95 -32 -33 18 421 84 -40 284 2022e 337 -80 -60 257 2023e 403 -125 -105 278 Sensitivity analysis We perform a sensitivity analysis of our 2022e net profit estimate as follows: Exhibit 81. Chuanzhiboke: sensitivity analysis of 2022e net profit ___________ 2022e short-term online/offline training growth changes ____________ 2022e employees’ remuneration to revenue ratio changes 4ppt 2ppt 0ppt -2ppt -4ppt -4ppt -21% -12% -3% 6% 15% -2ppt -20% -11% -1% 8% 17% 0ppt -19% -9% 0% 9% 19% 2ppt -18% -8% 1% 11% 20% 4ppt -17% -7% 3% 12% 22% Source: HSBC Qianhai Securities estimates 46 Demographics ● Equities August 2021 Valuation and risks We use a P/E methodology to value the stock. We expect the 2021-23e net profit CAGR to be 27%, higher than the 2019-2021e CAGR of 3%. Therefore, we use a 2022e P/E of 57x, c1.0 SD above its average historical P/E. Based on our 2022e EPS of RMB0.62, we derive a target price of RMB35.30, implying c43% upside. We initiate coverage with a Buy rating. The firm listed its shares in January 2021 at an issue price of RMB8.46. The stock price rose rapidly after the listing with a 2021e forward P/E of 62. Our target price implies 2.1x 2022e’s projected PEG, higher than the average PEG of K12 education companies (0.23x), mainly because K12 education companies are facing regulatory pressure and constraints while vocational education is strongly supported by policies. We use a higher-than-average PEG for vocational education companies (0.89x) and higher education companies (0.42x), mainly because: 1) the market size of IT training is higher than that of other segments of vocational education and maintains a high 2021-25e CAGR; 2) as a leading company in the IT training industry in China, Chuanzhiboke has leading R&D and a wide network coverage; and 3) Chuanzhiboke cooperated with Huawei’s operating system HarmonyOS to set up the Harmony developer community as well as develop and promote HarmonyOS, related courses and developer certification. With the wider usage of Harmony, Chuanzhiboke’s Harmony-related courses are expected to achieve a breakthrough in terms of sales. The share price has surged c26% since June 2021 (vs. an 8% decline for CSI 300), mainly driven by the rally in Huawei HarmonyOS-related stocks. The stock is trading at 40x 2022e forward PE, c0.8x SD lower than its historical average. We believe the expansion of its network and the growth in the number of trainees is not fully priced in. Share price catalysts: Growth in the number of trainees driven by strong demand for IT training; expansion of its nationwide network; supportive regulations rolled out. We expect Chuanzhiboke’s earnings will recover from COVID-19 in the following quarters given the pandemic is under control in China and there is strong demand for talent from the internet and other high-end manufacturing companies. Exhibit 82. Chuanzhiboke: one-year forward P/E range 45 35 25 15 5 2021-01-12 2021-02-12 2021-03-12 2021-04-12 2021-05-12 2021-06-12 2021-07-12 Max 80x +1 SD 57x Mean 48x -1 SD 38x Min 25x Source: Wind, HSBC Qianhai Securities 47 Demographics ● Equities August 2021 Environmental, social and governance metrics Environmental indicators: The company is a low-energy-consuming and pollution-free education enterprise and does not belong to the key pollutant discharging group of companies announced by the environmental protection department. Social indicators: 1) Employment: Chuanzhiboke has provided employment opportunities by recruiting 2,374 professionals in 2018, 8,204 in 2019 and 6,644 in 2020. 2) Staff welfare: Chuanzhiboke provides various welfare and training for its staff. 3) Public welfare: Chuanzhiboke provides financial aid to students from poor families by setting up scholarships. Governance indicators: 1) The proportion of independent directors is 42.9%, which is relatively high. 2) The separation of chairman and general manager helps improve its corporate governance structure. 3) The largest shareholder holds 41.4% which is high and indicates a concentrated and imbalanced equity structure. Key downside risks Intensified industry competition. More and more training institutions are entering the industry due to rising demand for digital talent, leading to intense homogenized competition in training products. Chuanzhiboke is facing the risk of intensified competition in the industry. Operating qualification risk. As the long-awaited Implementation Regulation of the Law on Promotion of Private Education has not yet come into effect, local authorities have different understandings over whether private profitable training institutions need to apply for school licences, so Chuanzhiboke faces the risk that it cannot obtain a license to run schools in a timely manner in some regions. Suspension of classes caused by the epidemic. Unexpected events such as the COVID19 epidemic may hit Chuanzhiboke’s offline business, while customers are inclined to participate in online training, resulting in a decrease in the number of customers during the epidemic. Chuanzhiboke faces the risk that emergencies will affect the normal operation of the company. Shareholdings via Shenzhen Stock Connect Chuanzhiboke was listed on 12 January 2021, and has no shareholders via Shenzhen Stock Connect. 48 Demographics ● Equities August 2021 Financials & valuation: Chuanzhiboke Education Buy Financial statements Year to 12/2020a Profit & loss summary (CNYm) Revenue 640 EBITDA 53 Depreciation & amortisation -20 Operating profit/EBIT 33 Net interest 8 PBT 64 HSBC Qianhai PBT 64 Taxation 1 Net profit 65 HSBC Qianhai net profit 65 Cash flow summary (CNYm) Cash flow from operations -27 Capex -14 Cash flow from investment -33 Dividends 0 Change in net debt 45 FCF equity -40 Balance sheet summary (CNYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders’ funds Invested capital 60 3 869 837 1,111 261 0 -837 850 672 12/2021e 1,055 195 -9 186 10 216 216 -24 192 192 329 -45 18 0 -355 284 81 18 1,234 1,192 1,470 428 0 -1,192 1,042 906 12/2022e 1,327 269 -21 248 13 281 281 -31 250 250 337 -80 -60 0 -288 257 111 47 1,533 1,481 1,827 536 0 -1,481 1,290 1,155 12/2023e 1,590 345 -36 310 16 346 346 -38 308 308 403 -125 -105 0 -312 278 163 85 1,854 1,793 2,237 641 0 -1,793 1,597 1,461 Ratio, growth and per share analysis Year to 12/2020a 12/2021e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC Qianhai EPS -30.8 65.0 -71.1 271.2 -80.3 470.3 -68.4 238.0 -63.9 195.6 Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (CNY) 1.0 1.3 8.1 22.0 8.0 20.3 5.8 14.9 8.2 18.5 5.1 17.6 -98.4 -114.4 -15.9 -6.1 EPS Rep (diluted) HSBC Qianhai EPS (diluted) DPS Book value 0.16 0.48 0.16 0.48 0.00 0.00 2.11 2.59 12/2022e 25.7 38.0 33.3 30.2 30.2 1.3 23.2 21.5 15.2 20.3 18.7 -114.7 -5.5 0.62 0.62 0.00 3.21 12/2023e 19.9 28.2 24.8 23.0 23.0 1.2 23.3 21.3 15.2 21.7 19.5 -112.3 -5.2 0.77 0.77 0.00 3.97 Valuation data Year to 12/2020a EV/sales EV/EBITDA EV/IC PE* PB FCF yield (%) Dividend yield (%) 14.3 173.7 13.6 153.2 11.7 -0.4 0.0 * Based on HSBC Qianhai EPS (diluted) 12/2021e 8.3 45.0 9.7 51.8 9.6 2.8 0.0 12/2022e 6.4 31.5 7.4 39.8 7.7 2.6 0.0 12/2023e 5.1 23.7 5.6 32.4 6.2 2.8 0.0 ESG metrics Environmental Indicators 12/2020a GHG emission intensity* n/a Energy intensity* n/a CO2 reduction policy No Social Indicators 12/2020a Employee costs as % of revenues n/a Employee turnover (%) n/a Diversity policy No Governance Indicators 12/2020a No. of board members 9 Average board tenure (years) 3.3 Female board members (%) 11.1 Board members independence (%) 44.4 Source: Company data, HSBC Qianhai Securities * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Issuer information Share price (CNY) Target price (CNY) 24.77 35.30 RIC (Equity) Bloomberg (Equity) Market cap (USDm) 003032.SZ 003032 CH 1,538 Free float Sector Country/Region Analyst Contact 10% Diversified Consumer Services China Jing Han +86 10 5795 2344 Price relative 40.00 35.00 30.00 25.00 20.00 15.00 2019 2020 Chuanzhiboke Education Source: HSBC Qianhai Securities Note: Priced at close of 06 Aug 2021 2021 Rel to CSI 300 Index 40.00 35.00 30.00 25.00 20.00 15.00 49 Demographics ● Equities August 2021 Disclosure appendix Analyst Certification The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Jing Han Important disclosures Equities: Stock ratings and basis for financial analysis HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. 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In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. 50 Demographics ● Equities August 2021 Rating distribution for long-term investment opportunities As of 10 August 2021, the distribution of all independent ratings published by HSBC is as follows: Buy 58% ( 30% of these provided with Investment Banking Services ) Hold 35% ( 29% of these provided with Investment Banking Services ) Sell 7% ( 27% of these provided with Investment Banking Services ) For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above. 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Share price and rating changes for long-term investment opportunities Offcn Edu (002607.SZ) share price performance CNY Vs Rating & target price history HSBC rating history From To Date N/A Buy 20 Nov 2019 53 Target price Value Date Price 1 24.00 20 Nov 2019 43 Price 2 25.20 17 Mar 2020 Price 3 35.40 09 Jun 2020 33 Price 4 34.80 20 Jul 2020 Price 5 39.70 15 Sep 2020 23 Price 6 53.30 16 Nov 2020 Price 7 48.80 09 Mar 2021 13 Price 8 Price 9 32.50 17 May 2021 29.40 30 Jun 2021 3 Price 10 21.20 27 Jul 2021 Source: HSBC Analyst Jing Han Analyst Jing Han Jing Han Jing Han Jing Han Jing Han Jing Han Jing Han Jing Han Jing Han Jing Han Aug-16 Aug-17 Aug-18 Aug-19 Aug-20 Aug-21 Source: HSBC To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please use the following links to access the disclosure page: Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures HSBC & Analyst disclosures None of the below disclosures applies to any of the stocks featured in this report. 1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 July 2021, HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 June 2021, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 June 2021, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 June 2021, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 51 Demographics ● Equities August 2021 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company 12 As of 04 Aug 2021, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology. 13 As of 04 Aug 2021, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology. 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In order to see when this report was first disseminated please see the disclosure page available at https://research.hsbcqh.com.cn/R/34/sDQCJCm 52 Demographics ● Equities August 2021 Disclaimer Legal entities as at 1 December 2020 ‘UAE’ HSBC Bank Middle East Limited, DIFC; HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada) Inc.; ‘France’ HSBC Continental Europe; ‘Spain’ HSBC Continental Europe, Sucursal en España; ‘Italy’ HSBC Continental Europe, Italy; ‘Sweden’ HSBC Continental Europe Bank, Sweden Filial; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Issuer of report HSBC Qianhai Securities Limited Block 27 A&B, Qianhai Enterprise Dream Park, 63 Qianwan Yi Road, Shenzhen-Hong Kong Cooperation Zone, Shenzhen, China Phone number: +86 755 8898 3288 Website: www.hsbcqh.com.cn Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch; PT Bank HSBC Indonesia; HSBC Qianhai Securities Limited; Banco HSBC S.A. 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MCI (P) 028/02/2021, MCI (P) 087/10/2020 [1174218] 53 HSBC Qianhai Research Team Head of Research, HSBC Qianhai Securities Steven Sun +86 755 8898 3158 stevensun@hsbcqh.com.cn Deputy Head of Research, Head of Research Product, HSBC Qianhai Securities John Chung China Equity Strategy Analyst, Head of China Equity Strategy Research Steven Sun +86 755 8898 3158 stevensun@hsbcqh.com.cn Analyst, A-share Equity Strategy Erin Zhang +86 21 6081 3836 erin.x.n.zhang@hsbcqh.com.cn Associate Anakin Tang Agriculture & Fishery Analyst, Head of A-share Agriculture Research Andy Li +86 21 6081 3812 andy.j.li@hsbcqh.com.cn Analyst, A-share Agriculture Research Yihui Sha +86 21 6081 3804 yihui.sha@hsbcqh.com.cn Auto & Auto Parts Analyst, Head of A-share Auto Research Yuqian Ding +86 10 5795 2350 yuqian.ding@hsbcqh.com.cn Consumer Analyst, Head of A-share Consumer Research Katharine Song +86 21 6081 3807 kathy.l.h.song@hsbcqh.com.cn Analyst, A-share Food & Beverage and Pulp & Paper Research Darron Xue +86 755 8898 3407 darron.xue@hsbcqh.com.cn Analyst, A-share Consumer Joseph Zhou +86 755 8898 3401 joseph.yj.zhou@hsbcqh.com.cn Analyst, A-Share Consumer Li Quan +86 755 8898 3471 li.quan@hsbcqh.com.cn Financials Analyst, Head of A-share Financials Research Angel Sun +86 21 6081 3815 angel.y.sun@hsbcqh.com.cn Associate Sean Zhang Industrials and Environmental Services Analyst, A-share Industrials & Environmental Amy Hu +86 755 8898 3505 ruo.lin.hu@hsbcqh.com.cn Infrastructure & Renewables Analyst, Head of A-share Infrastructure & Renewables Research Corey Chan +86 21 6081 3801 corey.chan@hsbcqh.com.cn Analyst, A-share Infrastructure & Renewables Research Dun Wang +86 21 6081 3802 dun.wang@hsbcqh.com.cn Healthcare Analyst, Head of China Healthcare Research Rachel Yang + 86 21 6081 3853 rachel.yang@hsbcqh.com.cn Analyst, China Healthcare Research Junjie Huang + 86 21 6081 3859 junjie.huang@hsbcqh.com.cn Associate Evie Liu Petrochemical & New Materials Analyst, Head of A-share Petrochemical and New Materials Eric Shen +86 10 5795 2343 eric.shen@hsbcqh.com.cn Analyst, A-share Petrochemical and New Materials Yi Ru +86 21 6081 3808 yi.ru@hsbcqh.com.cn Telecoms, Media & Technology Analyst, Head of A-share Technology Hardware Research Frank He +86 21 6081 3809 frank.fang.he@hsbcqh.com.cn Analyst, A-share Technology Hardware Research Chase Ding +86 755 8898 3409 chase.ding@hsbcqh.com.cn Analyst, A-share Technology Hardware Research Bingyi Zheng +86 21 6081 3828 bingyi.zheng@hsbcqh.com.cn Associate Steven Wang Analyst, Head of A-share Media & Internet Research Jing Han +86 10 5795 2344 jing01.han@hsbcqh.com.cn Associate Bruce Sun Analyst, Head of A-share IT Software Research Sijie Ma +86 10 5795 2342 sijie.ma@hsbcqh.com.cn Analyst, A-share IT Software Research Yiran Liu +86 10 5795 2349 yiran1.liu@hsbcqh.com.cn Transportation and Logistics Analyst, Head of A-share Transportation & Logistics Research David Wu +86 21 6081 3802 david.wu@hsbcqh.com.cn Associate William Sun Issuer of report: HSBC Qianhai Securities Limited Block 27 A&B, Qianhai Enterprise Dream Park 63 Qianwan Yi Road, Shenzhen-Hong Kong Cooperation Zone, Shenzhen, China Telephone: +86 755 8898 3288 Website: https://research.hsbcqh.com.cn Main contributors Jing Han* (Reg no: S1705518080001) Head of A-share Media & Internet Research HSBC Qianhai Securities Limited jing01.han@hsbcqh.com.cn +86 10 5795 2344 Jing Han joined HSBC Qianhai Securities Limited in 2017 and covers China media and Internet stocks. Previously he worked at a prominent Chinese securities firm. He holds a BA in engineering and an MSc in finance from Tsinghua University. Bruce Sun* (Reg no: S1700120090001) Associate Shenzhen * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered / qualified pursuant to FINRA regulations How to access our research Log on to the website research.hsbc.com Download the HSBC Global Research app Subscribe to our Podcasts by logging onto the research website and selecting the podcast icon Add HSBC Research app by accessing the symphony market and use the smart search functions Ask our team your research related questions at askresearch@hsbc.com Access Research via our third-parties: ® AlphaSense ® Bloomberg ® Bluematrix ® Factset ® Red Deer ® Refinitiv ® Research Exchange ® ResearchPool ® Sentieo ® S&P Global Market Intelligence ® Visible Alpha/ ONEaccess
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