Broker's View

Brokers remain bullish on Maple Leaf, despite 20pc tumble

Mainland’s largest international schools operator arranges urgent analyst briefing after stock exchange announcement spooks market

PUBLISHED : Wednesday, 03 August, 2016, 4:42pm
UPDATED : Wednesday, 03 August, 2016, 10:39pm

China Maple Leaf Educational Systems, the mainland’s largest international schools operator, appears to have successfully calmed broker nerves, after its shares lost more than a fifth of their value in two days.

The only Hong Kong listed company running an international school business in China, Maple Leaf saw its stock plunge 20 per cent last Friday to HK$6.65, and it lost another HK30 cents on Monday, after it revealed it had proposed granting options to an advisory firm Dingxianghui and a public relation agency Hong Kong Zhixin last summer, for 25 million shares, or 1.84 per cent of its stake, at an exercise price of HK$4 each.

Floated in November 2014, the firm’s share price had more than doubled in the past year, and hit an historic high of HK$8.8 last Wednesday.

Brokers had collectively been touting a promising future for the business, as growing numbers of Chinese middle class parents sign up their children for English tuition.

That potential was underlined further by consulting firm Frost & Sullivan, which said the number of mainland students enrolled in international schools had grown annually by 18.6 per cent from 2009 to 2013, and is expected to reach 11.8 per cent in coming years.

The surprise share price plunge, however, prompted an urgent analysts’ conference call after the market closed on Friday, at which officials outlined the thinking and background behind the potential move.

There is little fundamental reason to alter our positive view on the company
Nomura analysts Andrew Orchard and Shi Jialong

After talking with company officials, Jefferies analysts Johnny Kin and Kevin Zhao — who took part in the call — said while continued short-term fluctuation in the share price was likely, longer-term they are now happy Maple Leaf ’s fundamentals remain sound.

They said the share plunge was effectively down to market misunderstanding of the share-option exercise.

“We note the option grant was just a proposal, and that Maple Leaf has actually never granted the options to the consultants,” they explained.

“The company deemed the two consultants had not provided satisfactory services.

“Maple Leaf intends to terminate the service contract with the two companies and has engaged a lawyer to handle the dispute,” Kin and Zhao said.

Jefferies has now maintained its “Buy” rating on the stock with a target price of HK$8.6, adding that Maple Leaf has a final say on whether to grant the options, but they did add the issue is likely to overhang investor sentiment near term.

According to the statement, announced to Hong Kong exchange, Maple Leaf said it had agreed to grant share options to the two parties.

It said 40 per cent of the options would be exercisable if the firm’s market capitalisation reaches no less than HK$8 billion for 15 consecutive trading days within 18 months since June 8 last year, and the remaining 60 per cent becomes exercisable if the market cap reaches HK$10 billion for 15 trading days in 36 months.

The company’s shares were traded at HK$2.83 at that time, and due to the stock rally this year, the firm has already achieved the criteria for the 40 per cent options exercise.

Nomura analysts Andrew Orchard and Shi Jialong, who also took part in the conference call, said even if the options were issued, there could only be a potential one-off earnings risk, as they are likely to be non-cash payments.

“There is little fundamental reason to alter our positive view on the company,” they said.

Nomura has remained its “Buy” rating on the company, with a target price of HK$8.5.

Other brokers have also been left confident the share price plunge is likely to be temporary.

China Merchant Securities (HK) now expects the company to generate 29 per cent annual net profit growth in the coming three financial years ended August 2018, amounted to 468 million yuan from 212 million yuan for the year ended August 2012, thanks to its increase in schools and utilisation rate.

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