HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<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?

Asian Hedge Fund Manager, Long Short Equity, Macro

David Mudd

<ul>
<li>HSCI index has seen an outperformance of the consumer discretionary sector since the stimulus announcement while materials and energy sectors have lagged.</li>
<li>
<a href="https://www.smartkarma.com/entities/pop-mart-international-group-l" target="_blank" data-smartkarma-citation="entities:29016:1" rel="noopener">Pop Mart International Group L (9992 HK)</a> announced a blow out 3Q24 revenue number with international revenue up by over 400%. DB raised the its target price to $88.
</li>
<li>
<a href="https://www.smartkarma.com/entities/citic-securities-h" target="_blank" data-smartkarma-citation="entities:463:1" rel="noopener">Citic Securities (H) (6030 HK)</a> was maintained a BUY by Huatai, raising its target price to $28.81.   JP Morgan maintained  OVERWEIGHT on <a href="https://www.smartkarma.com/entities/new-oriental-education-techn" target="_blank" data-smartkarma-citation="entities:32210:1" rel="noopener">New Oriental Education &amp; Technology (9901 HK).</a>
</li>
</ul>


HSCI index has seen an outperformance of the consumer discretionary sector since the stimulus announcement while materials and energy sectors have lagged.

Pop Mart International Group L (9992 HK) announced a blow out 3Q24 revenue number with international revenue up by over 400%. DB raised the its target price to $88.


Citic Securities (H) (6030 HK) was maintained a BUY by Huatai, raising its target price to $28.81.   JP Morgan maintained  OVERWEIGHT on New Oriental Education &amp; Technology (9901 HK).



BUY/SELL/HOLD: Hong Kong Stock Updates (October 30)

<ul>
<li>Consumer sectors in China are gaining more focus as the government lays out steps to increase domestic consumption.</li>
<li>Hong Kong markets performed well relative to region during recent market turmoil.</li>
<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> and <a href="https://www.smartkarma.com/entities/china-reinsurance-group-corp" target="_blank" data-smartkarma-citation="entities:993:1" rel="noopener">China Reinsurance (Group) (1508 HK)</a> experienced breakouts and <a href="https://www.smartkarma.com/entities/china-telecom-corp-ltd-h" target="_blank" data-smartkarma-citation="entities:1015:1" rel="noopener">China Telecom (H) (728 HK)</a> had a breakdown. <a href="https://www.smartkarma.com/entities/anhui-conch-cement-co-ltd" target="_blank" data-smartkarma-citation="entities:159:1" rel="noopener">Anhui Conch Cement (914 HK)</a> is more positive.
</li>
</ul>


Consumer sectors in China are gaining more focus as the government lays out steps to increase domestic consumption.
Hong Kong markets performed well relative to region during recent market turmoil.

China Education Group (839 HK) and China Reinsurance (Group) (1508 HK) experienced breakouts and China Telecom (H) (728 HK) had a breakdown. Anhui Conch Cement (914 HK) is more positive.



Technically Speaking, Breakouts and Breakdowns: HONG KONG (AUGUST 9)

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)