Summary ■ With the Form 20-F filing deadline approaching, there is risk of delay due to the SEC investigation. However, our analysis shows that the end result may not be severe as feared. In this report, we have interviewed legal and tax experts, compared the varied interest entities (VIEs) of China education peers in terms of structure, legal documents and asset/profit transfer to wholly foreign-owned enterprise (WFOE). We have also conducted two mini case studies on previous SEC investigations to provide investors with more perspectives. See Figure 7 on Page 5 for a summary of major issues and our views.
■ Filing of Form 20-F and SEC investigation results may serve as near-term catalysts. We expect EDU to file its Form 20-F latest by October and the SEC investigations to complete in a timely manner. Meanwhile, EDU management has refuted and clarified almost all major allegations against it by a certain market participant and announced a buyback of US$50 mn. We also expect the company to disclose more information regarding the progress of the buyback programme soon.
■ Fundamentals still intact. Our primary research shows that EDU enjoys a price premium in its overseas test prep segment, besides showing healthy growth. K12 business is more competitive but growing faster; the 664 learning centres across the country have helped EDU to garner more market share in the less penetrated lower tier cities.
■ Valuation offers a buying opportunity with near-term catalysts. We are assuming coverage of the company with an OUTPERFORM rating and a target price of US$21.32 (previously $31.75) following reassignment of analyst coverage responsibilities. We use multiples valuations to analyse EDU and reach our target price of US$21.32, which represents 17x ex cash non-GAAP FY13E P/E and 46% potential upside. We have also trimmed our FY13E EPS by 7.2% in our DCF valuation due to margin pressure from expansion and the slowdown in Chinese economy.