China Education Group (00839.HK) delivers steady performance, undervalued and poised for recovery

$CHINA EDU GROUP(00839.HK) China Education Group Holdings Limited (00839.HK), a leading private education institution in mainland China, recently announced its annual results for the year ended August 31, showing stable growth in both revenue and profits. Following the results, the company's stock price rose for several consecutive days, reflecting the market's reassessment of oversold mainland education stocks. In fact, due to uncertainty about future performance, mainland education stocks have underperformed over the past three years, with particularly significant declines in 2023. This year may mark the bottom, and after valuation recovery is completed, next year could see a revaluation period.

For the past fiscal year, China Education Group reported an 11.9% year-on-year increase in revenue to RMB 7.36 billion (RMB, same below), achieving steady growth that was largely in line with expectations. Adjusted EBITDA grew by 10.5% to RMB 4.17 billion, exceeding general broker expectations, primarily due to better-than-expected cost control. The adjusted EBITDA margin was 56.6%, ranking high within the industry.

The gross margin was 53.3%, down 2.1 percentage points from the previous year but still above the industry average, reflecting economies of scale and some pricing power in tuition fees. Net profit attributable to the parent company was RMB 506 million, increasing by less than 1%, mainly due to a RMB 1.706 billion goodwill impairment charge for three of its schools, which pressured profits. This impairment reflects the risk of declining profitability in previous M&A projects. Slowing expansion in the future could gradually mitigate these risks.

As of the end of August, the number of full-time students was 282,000, up 5% year-on-year. For the 25/26 academic year, full-time student numbers increased by 0.2% year-on-year, with higher education students growing by 2.8%. Given the overall slowdown in student growth in recent years, this is considered good growth for a leading higher education institution.

Notably, capital expenditures during the period fell sharply by 45.2% to RMB 2.66 billion, indicating a turning point in capital spending. Compared to the previous large-scale external expansion, the company will now focus more on internal development, improving teaching quality and operational efficiency. Overall financial conditions, especially cash flow, will see significant improvements. China Education Group's current capital-to-debt ratio is about 26%, which is relatively low in the industry. There will be no need for large-scale funding to build new campuses in the future, and the current cash reserve of RMB 6.744 billion can be used for further debt reduction, benefiting future dividend prospects.

After the results announcement, CICC published a research report stating that China Education Group's FY2025 revenue was largely in line with expectations, while adjusted EBITDA growth of 10.5% year-on-year exceeded expectations, mainly due to better cost control. The non-declaration of dividends during the period was also in line with expectations.

Taking into account more conservative expectations for student numbers and tuition fee growth, the bank lowered its FY2026 revenue and adjusted EBITDA forecasts by 4% and 1%, to RMB 7.77 billion and RMB 4.19 billion, respectively. For FY2027, revenue and adjusted EBITDA are forecast at RMB 8.16 billion and RMB 4.42 billion, respectively. The "Outperform" rating was maintained. Due to lower industry average valuations, CICC reduced its target price for China Education Group to HK$3.5.

Investment sentiment in mainland education stocks has been affected by concerns over student growth, leading to poor overall stock performance. China Education's stock price was HK$13 three years ago and is now HK$2.95, a 77% decline. Over the past year, the stock has fallen 16%, but it is still considered relatively "resilient" in the industry, with other education stocks suffering even steeper declines.

China Education Group's current trading valuation has fallen to 2.8x FY2026 forecast adjusted EV/EBITDA, below peer and industry averages, with a significant discount to DCF valuation. The market may be underestimating its future profit potential. Pessimistic investor sentiment has overshadowed the company's premium as a leader and its past operational performance. The stock price has gradually recovered from the HK$2.7 level, reflecting bargain-hunting after the earnings report. If investment banks publish reports stating the company is undervalued, it could further boost the stock price. Investors may consider accumulating at current levels.

Author: Ouyang Feng