[I-bank focus]Morgan starts Wisdom Education at HK$4.1

   Morgan Stanley initiated coverage on Wisdom Education (06068) with an "equal-weight" rating and a target price of HK$4.1.
  The research house said schools that are owned and operated by Wisdom have high teaching quality, a high university acceptance rate (97%), high business visibility from grade 1 to grade 12, and its tuition fees are affordable.
  Wisdom has a diversified revenue source, with its percentage of ancillary service revenue (33% in FY2018) higher than at peers. However, Morgan is concerned that (1) Wisdom will register all its schools as not-for-profit and thus have to self-build new schools going forward. This process takes longer than does M&A, and would result in lower margin during the ramp-up period (usually 2-3 years to breakeven); (2) its gearing is already high, at 47% FY2018 net-debt-to-equity), and there are still capex requirements to build new schools (Rmb500-600mn per school); and (3) given its 100% exposure to K-12, Morgan estimated 40% impact to adjusted net profit in FY2020 if not-for-profit schools' profit does not belong to shareholders, and this would be the highest such level among peers.