Oriental Century Limited - Growing up with China's Little Emperor; Buy initiated

An undiscovered gem; Initiate with a Buy and TP S$1.88ORIC is highly undervalued at 16x FY08 PER vs. its peers' 27-35x. It shouldbecome a clear leader in the segment and offers cheap entry into the growingPRC educational market. ORIC is in the middle of an ambitious expansion push, soearnings could grow even faster than the market has factored in. Raffles Educ’sacquisition of a 21.36% stake in ORIC has further boosted investors’ confidence.Successful execution of its acquisition plan could raise upside potential to as muchas 133%, according to our scenario analysis.

Attractive value proposition amid rising govt education spending
Oriental Century offers an attractive value proposition to parents who are seeking
quality education given the “Little Emperor” syndrome in the PRC. The
government aims to increase education funding, which currently stands at only
3% of GDP vs. the world average of 7%. To broaden its educational footprint
following growing demand for private education, the group has also invested in
kindergarten and senior high schools under its branded “Oriental Pear” name.

Acquisition key to driving earnings, given its stable cash flow
We expect more positive newsflow regarding its acquisition pipeline although we
included only one acquisition in 2H07 for prudence. The group has opted for a
more aggressive expansion plan given its >RMB150m liquidity. Although our
forecasts reflect only 17% CAGR in PATMI, further acquisitions made by ORIC
could easily push our forecasts up (24% CAGR under best-case scenario).
TP of S$1.88 per share based on DCF
While its peers are trading at 27-35x FY08 PER, ORIC is deeply undervalued,
trading at only 16x. Our DCF/shr of S$1.88 (WACC – 7.3%; LT growth rate – 3%)
also affirms the deep discount and suggests upside of 88%. Key risk is no
acquisition but this scenario still provides 38% upside to the share price. Also, if
new players adopt similar strategies, this could result in price competition and
exert downward pressure on margins.