 We believe improved policy clarity, scarcity value and solid growth momentum will support further share price upside  We continue to prefer the higher education school operators over K-12; GBA is a particularly bright spot  Reiterate Buy ratings on CEG, Kepei, Maple Leaf and Yuhua; downgrade Hope and Wisdom to Hold on valuations Sustained momentum. Following a decent run in 2020, the school operators we cover have extended their share price gains year-to-date, led particularly by Hope Education (up 31%) and Tianli Education (up 18%). We believe this reflects improved investor sentiment towards policies and the search for scarce investment ideas (in the Hong Kong market) amongst Southbound investors. Although uncertainties remain on the Implementation Regulations of Private Education Promotion Law (民促法实施条例), concerns over the allowance of connected transactions – a key worry of many investors – were substantially eased after an elucidation by the Ministry of Education (MOE) in November 2020. Furthermore, in a separate statement in December 2020, the MOE stated its supportive stance for the group operations (集团化) of quality private school operators.

Growth has continued; more corporate moves. It is worth noting that the school operators offer solid, visible growth in the near term: on a combined basis, the student enrolment number of our coverage is up 28% in the current school year (i.e., school year 2020/21, see Exhibit 4). In the meantime, M&A activity – a key growth driver of the higher education school operators – has carried on, as reflected by the recent acquisitions made by Edvantage (382 HK, HKD9.21, not rated).

We continue to prefer the higher education operators over the K-12 operators, given the lower policy uncertainty and the additional growth opportunities brought by M&A activity. From a regional perspective, we believe the Greater Bay Area (GBA) represents a particularly burgeoning area, in view of ample growth opportunities and strong policy support.

Four names to Buy. We maintain our Buy ratings on the three higher education operators but downgrade Hope Education to Hold from Buy on valuation; in the K-12 area, we maintain our Hold ratings on Virscend as well as Tianli – we offer a deep-dive on the latter’s recent corporate financing activity in this report. Moreover, we downgrade Wisdom to Hold on valuation (after its share price ran up nearly 52% in the past three months). We also reiterate our Buy on Maple Leaf, as we like its solid long-term plan and expect a near-term business recovery after COVID-19 settles down.