by winston » Mon Jan 05, 2009 9:21 pm
20081229 SBI Raffles Education (RLS SP, S$0.58, BUY) - In a class of its own
Raffles Education (RLS SP, S$0.58, BUY) – In a class of its own
Initiating coverage with a BUY. We are initiating coverage on Raffles Education (REC) with a BUY recommendation and a 12-month target price of S$0.77, pegged at 15x FY06/10 P/E. We like education sector in general because it is a counter cyclical play to a softening economy that is often accompanied by high unemployment rate. Moreover, its colleges in China should continue to experience decent growth given that the country's educational capacity is still falling short of the increasing social demand.
Company profile
Established in 1990, Raffles Education Corp (REC) is the largest private education company primarily focused on Design and Business Management training in the Asia Pacific region. The company currently has 30 colleges across 9 countries with a total student population of about 33,000 students (as at Sept 2008). The company also owns the Oriental University City in Langfang, Hebei Province, China – a 3.31m square metres self-contained campus. Within this campus, there are 19 colleges with 57,000 students.
Investment merits
1) Resilient in an economic downturn
We believe REC offers good defensive play especially in times of highly uncertain macro environment. Education sector is usually viewed to be somewhat counter-cyclical as new student enrollment rates (including adult workers whom may see an increasing need to return to schools to upgrade their skills and practical training) may actually benefit from an economy downturn and weakening job market.
In particular, shorter-term programs such as Associate Degree, Diploma and Certificate programs tend to be more popular than higher level programs, which are longer term and require a larger commitment (such as Bachelor’s, Master’s Degrees). The degree of such resilience may also depend on the industries for which the programs are offered (For e.g., an education provider with a heavier exposure to healthcare training should do relatively better since the industry is typically considered to be evergreen in nature).
2) Growth strategies in place
Coupled with a scalable business model, REC plans to both organically and inorganically expand in two main directions:
Program breadth expansion – From purely design colleges, REC has subsequently expanded into additional fields such as Business Management (2004) and Psychology (2006) mainly through acquisitions. It intends to continue selectively expanding into other disciplines that have huge latent demand. As part of this strategy is the expansion into brownfield projects such as operating full-scale private vocational colleges and university cities in China.
Geographic expansion – REC’s 30 colleges are already widespread geographically throughout the Asia Pacific, with colleges in Australia (1), China (15), India (1), Malaysia (2), Mongolia (1), New Zealand (2), Singapore (3), Thailand (1) and Vietnam (4). Looking ahead, the company plans to continue expanding its presence in the region with a focus on three emerging countries i.e. China, India and Vietnam.
3) Buoyant industry prospects
In our view, China's education and training is still a sunrise industry. In particular, China's vocational education market has a huge untapped potential. In 2007, China's number of college graduates jumped to 4.79m from 2.50m in 2004, which on the one hand increases greatly employment pressure on the society while on the other hand, quite a few companies are still complaining that it is short of qualified talents. We believe such a poor match between supply and demand generates a huge demand for education after graduation. A continuous rise in the number of people pursuing bachelor and master degrees and a sustained expansion of college enrollment offer an enormous market for education and training industry.
In 2007, China had a total of 95,200 various kinds of private schools at all levels (excluding 22,300 private training institutions). The number of students aiming for various sorts of academic qualifications totaled 25.84m in the year, of which, 1.63m students studied in 297 private colleges and 1.87m students studied in 318 subordinate colleges. Notably, Chinese family's heavy emphasis on education and increasing rise in employment pressure at home provide a good opportunity for the domestic education/training sector.
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