This article is not to debate whether the decision is morally or economically justified but to identify any potentially undervalued companies within the industry. The company we have identified that stands out in valuations is Hong Kong-listed Edvantage Group Holdings, a small-cap education company in China.
Edvantage mainly provides services for private higher and vocational education institutions in China, specifically the Greater Bay Area (Guangdong-Hong Kong-Macau) of GBA. The company also operates overseas, such as in Australia and Singapore, and although it only contributes to 1% of the overall revenue currently, the company is pursuing international expansion. Edvantage operates nine schools, with the largest five schools in China. The company segments its schools into higher formal vocational education, which covers vocational schools, and secondary formal vocational education, which covers technical schools — over 80% of the students enrolled in the former segment.
Qualitatively sound
There are a couple of things to look out for before investing in companies in the education sector. Firstly, these companies should increase their volume by increasing the number of schools, students, services and subjects offered.
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Next, profitability from margin growth could be achieved by targeting market students of vocational and technical schools, offering special subjects where higher fees can be charged, and with a geographical or regional focus, where higher fees can be charged in first-tier cities compared to second- and third-tier cities within China. Edvantage has checked almost all of these boxes, making it a qualitatively sound business.
Chart 1 shows the steady growth of student enrolments for Edvantage over the past five years, while Chart 2 shows the increase in fees over the same period.
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A significant tailwind and prospect to consider for the company is how national policies promote the development of vocational education. Examples include favourable comments on vocational education from the official National Education Work Conference and “Report on the Work of the Government” over the past year.
Also, the State Council’s opinion on the importance of vocational schools is to boost the high-quality development of service consumption and enhance reforms for industrial workers. With the government’s support, business risk is likely reduced and a lower discount can be justified for Chinese education companies.
Next, Edvantage leverages the geographical and regional advantage of the GBA. The company is continuously investing in its schools within this region and has even purchased parcels of land to construct a new school campus, such as for its Jiangmen campus in the Guangdong Province. In terms of education quality, Edvantage collaborates with regional enterprises to provide hands-on and practical experience for its students and actively recruits industry experts and academic leaders. These resources are native and exclusive to GBA and being in the right place is strategic for the company.
Furthermore, Edvantage incorporates artificial intelligence (AI) and digitalisation into its schools and teaching facilities. An example is the “AI-empowered vocational education”, a core strategy integrating AI technology with digital teaching.
Other areas of initiative and development include AI teaching assistants, personalised learning analytics and virtual simulation training. Partnerships with leading global tech enterprises, such as Huawei, Baidu and JD.com, further solidify Edvantage’s digital education presence. Through these partnerships, students are exposed to fields such as big data and smart manufacturing, which improves the output of producing high-skill talent from the company’s schools.
Future plans
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The company intends to focus on its niche of providing high-quality vocational education. This ties nicely with the regional GBA’s environment of developing and upgrading its industrial sector, as national strategic emerging industries present many opportunities. Examples include demand for advanced manufacturing, new engineering disciplines, and the healthcare industry, where areas and fields such as new energy vehicles and smart healthcare show increasing interest and usage. Edvantage’s plans to establish industry-specific colleges can meet this increasing demand.
Qualitatively, the company’s financial health is good, with a net cash position and an interest cover of over eight times. At first glance, the company’s cash and current ratios of 0.82 and 0.89 times, respectively, might suggest liquidity troubles. However, 45% of its current liabilities are contract liabilities. These contract liabilities represent prepayments of tuition and boarding fees received before the commencement of school terms, which would be recognised as revenue over the remaining contract terms. Such contract liabilities shall not result in any cash outflow for the company, which suggests that the company should have ample liquidity.
The company trades cheaply compared to its domestic peers for its forward P/E, EV/Revenue, EV/ Ebit, EV/Ebitda and P/B ratios at a discount of 67%, 62%, 58%, 69% and 86%, respectively. Edvantage’s profitability is good, too, with a return on equity of 15.4% and a return on assets of 7.2%. Margins, which represent the competitive advantage of the company, are healthy, with 38.7%, 25.9% and 19.5% for gross margins, operating margins, and net income margins, respectively.
There are two “buy” calls, one “hold” call, and no “sell” calls for the company, with an average target price of over 93% of its current trading price. Based on our in-house quantitative valuations, we believe Edvantage is worth HK$2.11 ($0.35), 46.5% above its current trading price of HK$1.44. Chart 3 illustrates the different valuation metrics for the company, while Chart 4 weighs these metrics to arrive at the company’s intrinsic value.
Disclaimer: This article is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This article does not take into account an investor’s particular financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor's own discretion and/or after consulting licensed investment professionals, at their own risk.
