China Merchants Securities released a research report stating that it covered Tianli International Holdings (01773) for the first time, giving it an “increase” investment rating. As a leading local education brand, the future expansion of school construction and enrollment and the development of a trusteeship model is expected to support the company to maintain rapid growth. It is optimistic about the development prospects of the private education industry and the company's diversified business growth potential driven by immediate needs. Furthermore, the company's strengthened shareholder returns highlights long-term operating confidence. The adjusted net profit for the 2024-2026 fiscal year is expected to be 5.3/7.2/950 million yuan, with a target price of HK$5.36 billion.

The main views of China Merchants Securities are as follows:

Tianli International Holdings: A leading domestic private education service provider.

Tianli International Holdings Co., Ltd. is a leading private education service provider in western China. After the “Public Promotion Law Implementation Regulations” were issued in 2021, the company's business was adjusted to focus on for-profit high schools, supplemented by comprehensive literacy education/study tour/hosting services for elementary and middle schools. As of fiscal year 2023, Tianli had covered 36 cities in China.

Private education industry: The 100 billion market space is vast, and policies and regulations are constantly clarified.

The penetration rate of private high schools has continued to increase slightly in recent years, rising steadily from 9.5% to 18.3% between 2010 and 2022. Currently, the school-age population has not peaked. According to estimates, the private high market size range in 25 years is 150-218.5 billion yuan. On the policy side, the “Regulations on the Implementation of the Public Promotion Law” were revised and implemented in 2021, prohibiting private schools at the compulsory education stage from carrying out related transactions with stakeholders to promote the healthy development of the industry; starting in 2022, the state will issue documents encouraging and regulating the establishment of private schools, which is expected to promote private education enterprises to unleash their vitality in running schools and achieve positive growth.

Business model and competitive advantage: Transforming the “one branch, multiple branches” strategy, standardized management and sufficient resources create a high promotion rate.

Tianli's “One Branch” business focuses on for-profit high schools, and the “multi-branch” business provides value-added education services such as comprehensive literacy courses for elementary and junior high schools, study tours, hosting, and logistics. Tianli's competitive advantage in successfully standing out on the academic education circuit is its outstanding teaching results, excellent reputation and brand influence, driven by a mature, high-quality and standardized management system+rich rewards and promotion mechanisms, and strong support and subsidies from the local government. In 2023, Tianli's undergraduate acceptance rate reached 83.5%, far exceeding the level of Sichuan Province. 127 students entered the top 50 universities in the world. The high promotion rate also guarantees the school's sufficient student base and promotes a positive cycle of business growth.

Driven by future growth: The stock business has plenty of room to grow, and hosting is expected to open up a new growth curve.

There is plenty of room for improvement in the utilization rate of Tianli's own schools. As of the fall semester of 2023, the total number of students enrolled in Tianli's own schools has exceeded 100,000. It is expected that students enrolled in self-operated schools will maintain a 15-20% CAGR by 2027. Furthermore, the company will expand 3-5 new high schools every year in the future, and the growth in the number of students will guarantee a steady increase in revenue. Furthermore, it is expected that 100+ trusteeship classes will be launched in 2027, and the escrow business will become the second-largest revenue and profit growth curve.