HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-east-education-holdings" target="_blank" data-smartkarma-citation="entities:27843:1" rel="noopener">China East Education (667 HK)</a>'s 1H24 result is impressive with a 58% YoY increase in adjusted net profit. Good cost control is a key contributing factor. </li>
<li>Profitability has improved in all business segments. Its strategy to focus on higher-value courses has led to further improvement in annualised tuition per student. </li>
<li>The 1H24 result equals 68% of the full-year consensus, implying an upside in market expectations. Its net cash, at 35% of market capitalisation, is unmatched by peers.</li>
</ul>



China East Education (667 HK)'s 1H24 result is impressive with a 58% YoY increase in adjusted net profit. Good cost control is a key contributing factor. 
Profitability has improved in all business segments. Its strategy to focus on higher-value courses has led to further improvement in annualised tuition per student. 
The 1H24 result equals 68% of the full-year consensus, implying an upside in market expectations. Its net cash, at 35% of market capitalisation, is unmatched by peers.


China East Education (667 HK): Rock Solid Improvements

Asia Pac ECM and Index Rebal, Shenton Research

Ke Yan, CFA, FRM

Asia Pac ECM and Index Rebal

Asia Pac IPO & Placement Research, China Biotech

DZT Research

DZT Research is an independent Asia Pacific equity specialist. Our quantitative research covers index rebalancing flows, alongside exchange data analytics accross Asia Pacific. On the equity capital markets side, we focus on Asia Pacific ECM, especially biotech and TMT. Our lead analyst is frequently cited by international media.

Quantitative Analysis

<ul>
<li>We analyze the weekly Hong Kong Connect flows with our data engine for holding position as of March 14th.</li>
<li>The top stocks by inflows and outflows were tabulated for all market, HSCEI, mid cap and s/mid cap groups.</li>
<li>We highlight flows for Alibaba, Guotai Junan Securities, Tencent, Kuaishou, Xiaomi, Geely Automobile, SMIC.</li>
</ul>


We analyze the weekly Hong Kong Connect flows with our data engine for holding position as of March 14th.
The top stocks by inflows and outflows were tabulated for all market, HSCEI, mid cap and s/mid cap groups.
We highlight flows for Alibaba, Guotai Junan Securities, Tencent, Kuaishou, Xiaomi, Geely Automobile, SMIC.


Hong Kong Connect Flows (Mar 14th): Alibaba, Guotai Junan, Tencent, Kuaishou, Xiaomi, Geely, SMIC

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-education-group-holdin" target="_blank" data-smartkarma-citation="entities:18218:1" rel="noopener">China Education Group (839 HK)</a>'s plunge in share price is due to management's guidance for a 10-15% drop in adjusted net profit, significantly lower than the current consensus.</li>
<li>Its decision to pause dividends for the foreseeable future on debt repayment burden and tight offshore refinancing environment for the sector has further disappointed the market.</li>
<li>Based on guidance, its PER of 3.7x and nil dividend yield for FY25 make it unattractive relative to peers (1.7-2.9x PER). We shy away until things improve.</li>
</ul>



China Education Group (839 HK)'s plunge in share price is due to management's guidance for a 10-15% drop in adjusted net profit, significantly lower than the current consensus.
Its decision to pause dividends for the foreseeable future on debt repayment burden and tight offshore refinancing environment for the sector has further disappointed the market.
Based on guidance, its PER of 3.7x and nil dividend yield for FY25 make it unattractive relative to peers (1.7-2.9x PER). We shy away until things improve.


China Education Group (839 HK): A Large Disappointment

China New Higher Education / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-new-university" target="_blank" data-smartkarma-citation="entities:23626:1" rel="noopener">China New Higher Education (2001 HK)</a> has rebounded by 40% from its post-result trough but was still down by 34% from the pre-FY24 result level, despite healthy FY24 results.</li>
<li>Net profit is healthy, but it is the all-scrip final dividends that dragged on the share price. Concerns are on higher gearing, but at 69.9%, this is still acceptable. </li>
<li>The consensus earnings forecast of a 6% growth in FY25 and FY26 seems not excessive. At 2.2x PER and 22% yield for FY25, it seems worthy of the risks.</li>
</ul>



China New Higher Education (2001 HK) has rebounded by 40% from its post-result trough but was still down by 34% from the pre-FY24 result level, despite healthy FY24 results.
Net profit is healthy, but it is the all-scrip final dividends that dragged on the share price. Concerns are on higher gearing, but at 69.9%, this is still acceptable. 
The consensus earnings forecast of a 6% growth in FY25 and FY26 seems not excessive. At 2.2x PER and 22% yield for FY25, it seems worthy of the risks.


China New Higher Education (2001 HK): 2.2x PE, 22% Yield, Worth Taking the Risk?

<ul>
<li>Although the reported FY24 net profit plunged 69.7% due to intangible impairments, <a href="https://www.smartkarma.com/entities/china-education-group-holdin" target="_blank" data-smartkarma-citation="entities:18218:1" rel="noopener">China Education Group (839 HK)</a>'s adjusted net profit grew by 3.3% and adjusted EBITDA by 12.3%.</li>
<li>Based on adjusted net profit, its payout ratio is flat at 40%, implying an 8% dividend yield. This suggests underlying operations are decent and demonstrate confidence in the outlook.</li>
<li>Both tuition and enrollment are expected to sustain growth in FY25, meaning that a consensus forecast of 9% net profit is achievable. Its 4.5x PER does not appear stretched.</li>
</ul>


Although the reported FY24 net profit plunged 69.7% due to intangible impairments, China Education Group (839 HK)'s adjusted net profit grew by 3.3% and adjusted EBITDA by 12.3%.
Based on adjusted net profit, its payout ratio is flat at 40%, implying an 8% dividend yield. This suggests underlying operations are decent and demonstrate confidence in the outlook.
Both tuition and enrollment are expected to sustain growth in FY25, meaning that a consensus forecast of 9% net profit is achievable. Its 4.5x PER does not appear stretched.


China Education Group (839 HK): What's up After the Big Bath?

China

China East Education is the largest vocational training education provider in China, offering courses in culinary arts, information and internet technology, auto services, and fashion and beauty. The company operates under various brands including New East, Omick, Xinhua Internet, Wisezone, Wontone, and On-mind. It was founded in 1988 and is headquartered in Hefei, Anhui Province, China.

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China East Education (667 HK)