EASTERN PIONEER(603377)INITIATION：CORE BUSINESS MAY POST STRONG RECOVERY BACKED BY VR & GENERAL AVIATION

　　Eastern Pioneer Driving School is the domestic leader in driving training.
　　Its earnings fluctuated due to regional Covid flare-ups in China over 2020-2022. With the relaxation of China’s Covid control, we expect its traditional core driving training business to record post-pandemic recovery. Meanwhile, the Company has been proactively building a presence in intelligent driving training & aviation training over the past three years. 1) With the promotion of intelligent driving training driven by supportive government policies, the penetration of intelligent driving training may accelerate. As a sector leader with first-mover advantage as well as an edge in supply chains and data, Eastern Pioneer stands well to benefit. 2) Aviation training has been developing steadily, and the Company has become a leading player, yet with a low market share. With the further improvement of parallel hardware, we expect its market share to expand continuously. Overall, we are sanguine about the Company’s short-term earnings recovery, as well as the prospects of secular growth for its intelligent driving training & aviation training businesses. We assign 28x 2023E PE to derive a target price of Rmb10 and initiate coverage with a “BUY” rating.
　　 Eastern Pioneer is the domestic leader in driving training.
　　As the one and only A-share listco in the driving training industry, Eastern Pioneer has been mainly engaged in providing motor vehicle driver training & aviation training services, with business mainly based in Beijing (the Company’s market share in Beijing reached as high as 35% in 2019). Besides, it also has business in many other regions such as Yunnan, Hubei, Hebei, Shandong. Eastern Pioneer achieved revenue of Rmb1.20bn and net profit of Rmb152mn in 2021.
The driving training industry sees stable demand with broad growth prospects, and leading players stand well to benefit from sector pattern optimization.
　　The number of newly licensed drivers reached 27.5mn nationwide in 2021 and has remained above 27mn for many years (except 2020). In terms of penetration rates, the penetration rate of drivers in China is only 34% vs. above 50% in most developed countries, indicating vast growth headroom.
　　The industry structure is fragmented. As of the end of 2020, there were more than 20k motor vehicle driving training institutions across China. Under the disruptions of regional Covid flare-ups over 2020-22, certain small- and medium-sized institutions were gradually knocked out of the market. Looking ahead, as the industry moves towards intelligentization and standardization, leading companies that have piled in and built full exposure to relevant areas stand well to benefit further.
Investment highlights: In the short term, we advise investors to keep tabs on the recovery of the core driving training business, and VR & general aviation create medium-to-long term growth upside.
The traditional driving training business may gradually recover, and the profit margins of off-site projects will likely improve:　　We have witnessed a robust recovery for the traditional driving training business over 3Q20-3Q21 under the gradually stabilized Covid control, with the 1-3Q21 net profit at Rmb169mn, up 103.3% YoY. However, its earnings somehow fluctuated due to the recurring of regional Covid flare-ups in China since 4Q21. We believe that with the lifting of Covid restrictions, Eastern Pioneer's traditional driving training business will likely recover quickly. At the same time, the Company's off-site projects that used to produce a drag on profits have gradually become fully-fledged in recent years. The Company’s Kunming/Jingzhou projects posted net profit of Rmb7.08mn/11.21mn in 2021, and the losses in its Shijiazhuang and Shandong businesses have also declined to a certain degree. We expect its profit margins to rise further going forward.
VR intelligent driving training created a unique edge, with broad growth prospects under the trend of the asset-light model & industrial intelligentization: Eastern Pioneer has been cooperating with Chigusa Phantom to carry out the virtual reality (VR) intelligent driving simulator training business since 2018, and by the end of 2021, more than 1,000 VR driving simulators have been set up across China. VR intelligent driving training can greatly reduce training costs, along with a more flexible buildout of network base stations, as well as a higher asset-light degree for expansion, compared with traditional training methords. With the further deepening of the trend of intelligentization in the driving training industry, the penetration expansion of smart driving training may accelerate. The Company stands well to take the lead on the back of first-mover advantage, an independent supply chain and rich data accumulation.
The Company has been proactively building exposure to aviation training to make use of the industry growth trend.
　　Eastern Pioneer has been proactively making use of the boom of the aviation training industry by building parallel hardware, such as three aviation training schools and four airports for flying training. In 2021, its subsidiary Eastern Pioneer International Aviation Development posted revenue of Rmb125mn and net profit of Rmb14.3mn, with a total of 376 trainees sent from airline companies. Looking ahead, its short-term growth is supported by the order in-takes on hand (according to the Company's announcement, as of 1H22, the order in-takes on hand reached Rmb313mn), and the sustained improvement and strong parallel hardware support will improve its training capacity and efficiency. The Company's market share is only c.5% at this point, indicating vast growth headroom.
Potential risks: Disappointing student enrollment; the commissioning of the Company’s new projects missing expectations; changes in industry policies; increased industry competition; a new round of recurring Covid infections weighing on training and enrollment.
Investment recommendation: In the short term, with the relaxation of Covid control, we expect Eastern Pioneer’s core business to recover. In the medium-to-long term, the Company may create secular growth upside backed by proactively building exposure to new areas such as intelligent driving training and aviation training. We forecast its 2022E-24E net profit to be Rmb-37mn/255mn/325mn. With the average comps valuation of 23x 2023E PE for Chuanzhiboke Education (003032.SZ),　　China East Education (00667.HK) and Action Education (605098.SH) (the PE multiples of the first two are based on CITICS Research forecasts, and that of Action Education is based on Wind consensus estimates) as a reference, and considering its short-term high earnings recovery elasticity and the prospects of vast growth upside in the medium and long term, we assign 28x 2023E PE to derive a target price of Rmb10 and initiate coverage with a “BUY" rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。