HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>Global EdTech venture funding surged 29% YoY to US$20.8bn in 2021. China saw c.75% YoY decline in EdTech venture funding but India recorded over 60% growth.</li>
<li>Into 2022, we expect EdTech spending and market will continue to grow, venture funding becoming more selective and Asia and workforce are the fastest growing markets.</li>
<li>China stays weak in 1H22 and India will thrive. India has 4 new unicorns in 2021 while none for China. We stick to higher education, not EdTech (tutoring) in China.</li>
</ul>


Global EdTech venture funding surged 29% YoY to US$20.8bn in 2021. China saw c.75% YoY decline in EdTech venture funding but India recorded over 60% growth.
Into 2022, we expect EdTech spending and market will continue to grow, venture funding becoming more selective and Asia and workforce are the fastest growing markets.
China stays weak in 1H22 and India will thrive. India has 4 new unicorns in 2021 while none for China. We stick to higher education, not EdTech (tutoring) in China.


Asia EdTech and China Education: An Update

<ul>
<li>China Education Sector, specifically <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>, should see better performance in 2022 as regulatory concerns gradually ease. 1H22 result for higher education segment should be a proof.</li>
<li>
<a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> could reverse the bad fortune in 2022 on the back of realisation of undervalued assets, expansion of logistics facilities and better performance at Shenzhen Airlines.</li>
<li>
<a href="https://www.smartkarma.com/entities/china-dongxiang-group-co" target="_blank" data-smartkarma-citation="entities:1068:1" rel="noopener">China Dongxiang (3818 HK)</a> remains an undervalued asset play. Its ability to realise value of its investment portfolio, potential resumption of dividend payout and recovery of sportswear business are drivers.</li>
</ul>


China Education Sector, specifically China Education Group (839 HK), should see better performance in 2022 as regulatory concerns gradually ease. 1H22 result for higher education segment should be a proof.

Shenzhen International (152 HK) could reverse the bad fortune in 2022 on the back of realisation of undervalued assets, expansion of logistics facilities and better performance at Shenzhen Airlines.

China Dongxiang (3818 HK) remains an undervalued asset play. Its ability to realise value of its investment portfolio, potential resumption of dividend payout and recovery of sportswear business are drivers.


Our Three Worst Calls in Last Year and Any Room for a Reversal in 2022?

In Sep, various ministries and local governments have announced detailed regulations or opinion-seeking drafts for the implementation of central government's "Double Reduction" Opinions. The areas that covered by these regulations range from the qualifications of tutors to the advance collection of tuition fees. While this should be anticipated, we think there is risk of regulatory overshoot which will put further pressure on the after-school tutoring companies like <a href="https://www.smartkarma.com/entities/new-oriental-education-technology-group" target="_blank" data-smartkarma-citation="entities:32210:1" rel="noopener">New Oriental Education &amp; Technology Group (9901 HK)</a>, <a href="https://www.smartkarma.com/entities/tal-education-group" target="_blank" data-smartkarma-citation="entities:1124:1" rel="noopener">TAL Education (TAL US)</a> and <a href="https://www.smartkarma.com/entities/gaotu-techedu-inc" target="_blank" data-smartkarma-citation="entities:28069:1" rel="noopener">Gaotu Techedu (GOTU US)</a>.We can see that the regulations are all targeted on off-campus after-school tutoring but not on the higher and vocational segment. In this regard, we believe <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>, which focused on higher education, and <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>, which focused on vocational training, are better positioned in this wave of regulatory crackdown.

In Sep, various ministries and local governments have announced detailed regulations or opinion-seeking drafts for the implementation of central government's "Double Reduction" Opinions. The areas that covered by these regulations range from the qualifications of tutors to the advance collection of tuition fees. While this should be anticipated, we think there is risk of regulatory overshoot which will put further pressure on the after-school tutoring companies like New Oriental Education &amp; Technology Group (9901 HK), TAL Education (TAL US) and Gaotu Techedu (GOTU US).We can see that the regulations are all targeted on off-campus after-school tutoring but not on the higher and vocational segment. In this regard, we believe China Education Group (839 HK), which focused on higher education, and China East Education (667 HK), which focused on vocational training, are better positioned in this wave of regulatory crackdown.

China Private Education: More Regulations Rolled Out Backing "Double Reduction"

Share price of the China Education Sector stocks, particularly the US listed online education ones, are hit hardest on Friday amid the rumoured release of extremely stringent government regulatory changes. The CCPC and State Council official announcement was made on Saturday, and basically removed the survival of online and curriculum-related after-school tutoring classes for Pre-K and compulsory education grades. <a href="https://www.smartkarma.com/entities/new-oriental-education-tech-grp-adr" target="_blank" data-smartkarma-citation="entities:531:1" rel="noopener">New Oriental Education (EDU US)</a>, <a href="https://www.smartkarma.com/entities/tal-education-group" target="_blank" data-smartkarma-citation="entities:1124:1" rel="noopener">TAL Education (TAL US)</a> and <a href="https://www.smartkarma.com/entities/gaotu-techedu-inc" target="_blank" data-smartkarma-citation="entities:28069:1" rel="noopener">Gaotu Techedu (GOTU US)</a> all pledged to support the decisions on Saturday night via Weibo.We believe the best way to position in the sector is to focus on higher and vocational education sub-segments. In this regard, <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> is best positioned given its pure exposure in this market and nil exposure to K-12 schools (online/offline). The 26.3% drop in share price from the peak provides an attractive entry point, in our view. Among the three online education companies, <a href="https://www.smartkarma.com/entities/new-oriental-education-tech-grp-adr" target="_blank" data-smartkarma-citation="entities:531:1" rel="noopener">New Oriental Education (EDU US)</a> looks comparatively safer due to its buffer from other businesses, but we would warn against the extreme risks associated with bottom-fishing this name.

Share price of the China Education Sector stocks, particularly the US listed online education ones, are hit hardest on Friday amid the rumoured release of extremely stringent government regulatory changes. The CCPC and State Council official announcement was made on Saturday, and basically removed the survival of online and curriculum-related after-school tutoring classes for Pre-K and compulsory education grades. New Oriental Education (EDU US), TAL Education (TAL US) and Gaotu Techedu (GOTU US) all pledged to support the decisions on Saturday night via Weibo.We believe the best way to position in the sector is to focus on higher and vocational education sub-segments. In this regard, China Education Group (839 HK) is best positioned given its pure exposure in this market and nil exposure to K-12 schools (online/offline). The 26.3% drop in share price from the peak provides an attractive entry point, in our view. Among the three online education companies, New Oriental Education (EDU US) looks comparatively safer due to its buffer from other businesses, but we would warn against the extreme risks associated with bottom-fishing this name.

China Private Education: How to Position After the Regulatory Crackdown?

Research on Tech Companies

Evelyn Zhang

A series of recent Chinese policies promoting vocational schools instead of traditional secondary education, and efforts to eliminate after-class cramming makes me to recommend short K12 education related stocks and long vocational training related stocks.

A series of recent Chinese policies promoting vocational schools instead of traditional secondary education, and efforts to eliminate after-class cramming makes me to recommend short K12 education related stocks and long vocational training related stocks.

A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education

Hong Kong

China Education Group operates private higher and secondary vocational education institutions across Mainland China, Australia, and the UK. The company offers a range of programs including junior college diplomas, bachelor's and master's degrees, continuing education, and vocational training, alongside educational consultancy services. It was founded in 1989 and is headquartered in Central, Hong Kong.

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China Education Group (839 HK)

Asia EdTech and China Education: An Update

China's EdTech venture funding lagged behind India's in 2021. We expect regulatory concerns to keep China underperforming in 1H22, with India...

Osbert Tang, CFA

Our Three Worst Calls in Last Year and Any Room for a Reversal in 2022?

China Education Sector, Shenzhen Intl and China Dongxiang are the three worst calls that we made in last year. We believe there is room for a...

Osbert Tang, CFA

China Private Education: More Regulations Rolled Out Backing "Double Reduction"

More detailed regulations on after-school tutoring have been rolled out by various ministries and local governments in Sep. The higher education...

Osbert Tang, CFA

China Private Education: How to Position After the Regulatory Crackdown?

Focus on higher and vocational education sub-segments is the best position amid regulatory crackdown. For online players, New Oriental looks more...

Osbert Tang, CFA

A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education

Change is afoot in one of China's main social mobility mechanism, the education system. The country is promoting vocational education in an effort...

Evelyn Zhang

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