Morgan Stanley initiated coverage on Yuhua Education (06169) with an "overweight" rating and a target price of HK$4.1.
The research house said Yuhua is shifting its focus from K-12 to higher education, although it had only one university before 2017. Revenue from higher education was 59% of Yuhua's total revenue in 1H FY2019.
Morgan views its expansion into universities as positive for margins. It is positive on Yuhua's ability to turn the newly acquired Thailand university to a positive profit margin given Yuhua's proven operation ability and synergies with Yuhua's current K-12 schools.
While Yuhua has 37% FY2019 revenue exposure to Grade 1-12, Morgan thinks its earnings estimates could see 21% and 31% downside risk in FY2020 in FY2021, respectively, if the government rules that compulsory schools' profit doesn't belong to shareholders.
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