Time to swot up. We initiate coverage on eight private school operators in this report. Private education is a relatively new and fast-growing sector for investors so we’ve also published today an accompanying thematic detailing everything you need to know: Time for school: A look at private schools in China. The focus of this report is on the companies, how they’ve performed, and why we like them.  

Prefer higher education vs. K-12. Recent headlines around potential policy changes have shaken the share prices of school operators, especially kindergarten to Grade 12 (K-12) players. However, we continue to see ample growth opportunities ahead. We particularly like higher educational players as they benefit from better policy certainty, more demand for higher vocational education, and the need to upgrade students’ skills amid the soft economy. For K-12 school operators, their prospects aren’t as rosy but there are also some positives especially as they have already taken steps to address policy uncertainties. We also expect the M&A spree to continue though we believe this warrants closer, more bottom-up analysis from investors, and which we provide in this report.  

A proprietary scorecard: We forecast our eight covered private school operators to maintain their current pace of growth – up by a CAGR of 30% in FY17-19 in both revenue and core profit – on organic expansion and acquisitions. But given the complexity of the sector, in addition to our fundamental business analysis and financial analysis, we also introduce a proprietary scorecard. This ranks 14 measures, from the concentration of shareholdings to their M&A track record. In this report we also provide dedicated sections regarding key risks, policy issues, ESG matters, and share price drivers. Importantly, we also examine the connected transactions that many private school operators engage in, and outline where the potential risks are. 

Higher education: Our preferred player is China Educational Group (CEG), China’s largest listed company in this space. We see its leading scale, experience, and more M&A driving growth. We also initiate on Hope, Kepei, and Yuhua with Buy ratings.  

K-12: Our preferred pick is Maple Leaf, a leading international school operator, in part because of its aggressive targets and likelihood of more M&A. We also initiate on Wisdom with a Buy rating, and Virscend and Tianli with Hold ratings.