Investment Highlights

Transitioning towards a vocational education group. The Companyhas undergone multiple rounds of reorganizations and change of controlsince its establishment. In 2011 Peking University became the actualcontroller and the Company had focused its main operations on realestate, warehousing and foreign trade since. In 2H15, the Company seta new goal – building a leading vocational education group by leveragingthe educational resources of Peking University. We expect the Companyto gradually spin off its former main operations and transit into apure-play educational resource integration platform. It has sold part of itsstake in the warehousing and logistics business, is now winding up itsreal estate unit and will probably strip off its trade operations in duecourse.

Vocational schools: Taking the first step. Demand for technical talentand trained workers will likely surge under the "Made in China 2025"proposition, and vocational education providers are well-positioned tobenefit from the rising demand and China’s supportive policies. TheCompany has taken its first step by partnering with Zunyi MedicalUniversity (ZMU) in Guizhou Province to expand ZMU’s School ofMedicine and Technology. Based on our estimates of an average grossmargin of 37-45% for A-share vocational education providers, we expectthe Zunyi project to deliver annual cash flow of Rmb12-24mn for theCompany in the short term. Looking ahead, we think the Company willcontinue to expand its network of vocational schools by partnering withaccredited educational institutions and taking controlling stakes in suchvocational schools. We believe the brick-and-mortar schools will lay thegroundwork for the Company to achieve its ambition of building avocational education conglomerate.

MOOCs (massive open online courses): An ultimate game-changerof the higher education ecosystem. In addition to brick-and-mortarvocational schools, the Company is tapping into the online educationsegment. On the one hand, it is making investment in MOOC-basedtraining programs and has acquired some established MOOC providersto capture the future trend of higher/vocational education. On the otherhand, it has launched cross-border cooperation (with Peking UniversityPearson and the Korea-based Lumsol) to provide online Chineselanguage education. Although the MOOC model will not contributesignificantly to the Company’s bottom-line in the short term, we thinkbuilding a complete vocational education ecosystem is of paramountimportance. Under the existing regulatory framework, we think theCompany could provide professional training and accredited coursestargeting enterprises via its MOOC platform. Looking ahead, with moreexplicit and supportive policies from the regulators, we believe theMOOC model could eventually disrupt higher education/campus-basedlearning, reaching learners globally and forming an online learningecosystem. TopU.com, an integrated MOOC service provider that the Company invested in, will likelybecome a secular growth driver for the Company.

Potential risks: Disappointing national education policies; and slower-than-expected businessexpansion of the Company.

Earnings forecast, valuation and investment rating: BUY initiate with a TP of Rmb17.The Companyhas set a clear goal to transform into a large vocational education group. By leveraging thereputation/teaching experience of Peking University, the MOOC-based training programs, and offlineresources (teachers, students and classrooms provided by its vocational schools), the Company is nowbuilding a complete ecosystem in the vocational education sector. The abundant cash on hand andsupportive policies also position the Company well to drive growth through M&A activities. In the next 2-3years, we expect the Company to continue to optimize its business structure by adapting to China’stalent demand and evolve into a leading online/offline vocational education group. Assuming theCompany will successively exit from its real estate, warehousing and trade operations during2016-2018E, we estimate its EPS for these three years to be Rmb1.29/0.26/0.34. The Company’scurrent share price of Rmb12.13 implies a higher 2017E PE of 46x and a lower market cap of Rmb7.1bnas compared to A-share vocational education providers, which are currently trading at an average 2017EPE of 43x with average market cap around Rmb9bn. Considering the Company’s strategic positioning,unique advantages in educational resources (backed by Peking University) and presence in thepromising MOOCs segment, we initiate our coverage with a BUY rating and a target price of Rmb17,implying a 65x 2017E PE and Rmb10bn market cap.