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> is interesting as it is probably the only education company with no debt. Net cash amounted to Rmb2.1bn, or 42% of its market capitalisation. </li>
<li>Earnings have bottomed out and the marginal YoY decline in 1H23 is due to upfront costs for staff recruitment. Its vocational education focus also faces fewer regulatory risks.</li>
<li>We consider it a potential privatisation candidate at 0.8x P/B. Its major shareholders owned 75% of the company, leaving a free float of less than HK$1.4bn.</li>
</ul>



China East Education (667 HK) is interesting as it is probably the only education company with no debt. Net cash amounted to Rmb2.1bn, or 42% of its market capitalisation. 
Earnings have bottomed out and the marginal YoY decline in 1H23 is due to upfront costs for staff recruitment. Its vocational education focus also faces fewer regulatory risks.
We consider it a potential privatisation candidate at 0.8x P/B. Its major shareholders owned 75% of the company, leaving a free float of less than HK$1.4bn.


China East Education (667 HK): Getting More Interesting

<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> appears to be facing the headwinds from higher USD interest rate and reduction in capitalised interest. The intangible write-off is another drag on FY23.</li>
<li>Newly registered students increased 17.8% for FY24. With better average fees, this will help the topline. Our concerns are high finance and operating costs will erode revenue growth.</li>
<li>Consensus is overly aggressive and there are risks of downgrade. Earnings may re-accelerate in the future, but weaker 1H FY24F keeps us on the sideline in the short term. </li>
</ul>



China Education Group (839 HK) appears to be facing the headwinds from higher USD interest rate and reduction in capitalised interest. The intangible write-off is another drag on FY23.
Newly registered students increased 17.8% for FY24. With better average fees, this will help the topline. Our concerns are high finance and operating costs will erode revenue growth.
Consensus is overly aggressive and there are risks of downgrade. Earnings may re-accelerate in the future, but weaker 1H FY24F keeps us on the sideline in the short term. 


China Education Group (839 HK): Not so Encouraging in the near Term

<ul>
<li>Despite the rally in share price after trading resumption and a reasonable FY22 result, there are still several tough issues faced by <a href="https://www.smartkarma.com/entities/china-yuhua-education" target="_blank" data-smartkarma-citation="entities:23627:1" rel="noopener">China Yuhua Education (6169 HK)</a>. </li>
<li>Cash management, especially for offshore; no dividend payout in the near term; availability of CB refinancing and weakened margins are just some of the challenges. </li>
<li>Conversion to profit-basis for its schools and the operating outlook for new schools are also added issues that it needs to address. In our view, risks still outweigh return.</li>
</ul>


Despite the rally in share price after trading resumption and a reasonable FY22 result, there are still several tough issues faced by China Yuhua Education (6169 HK). 
Cash management, especially for offshore; no dividend payout in the near term; availability of CB refinancing and weakened margins are just some of the challenges. 
Conversion to profit-basis for its schools and the operating outlook for new schools are also added issues that it needs to address. In our view, risks still outweigh return.


China Yuhua Education (6169 HK): Issues Are Not over Yet

<ul>
<li>Positive response of <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 placement indicated a good return of investor appetite to the sector. Its premium multiples stay well justified even after recent rally. </li>
<li>The HK$1.6bn proceeds will reduce gearing to 29.2% (including contract liabilities) from 41.7% with minimal dilution. Narrowing in valuation gap against asking price of targets means more M&amp;A potential. </li>
<li>More funding for expansion of existing campuses, increase in accommodation and the set up of COVID-19 related curriculum will allow CEG to realise higher revenue per student.</li>
</ul>


Positive response of China Education Group (839 HK)'s placement indicated a good return of investor appetite to the sector. Its premium multiples stay well justified even after recent rally. 
The HK$1.6bn proceeds will reduce gearing to 29.2% (including contract liabilities) from 41.7% with minimal dilution. Narrowing in valuation gap against asking price of targets means more M&amp;A potential. 
More funding for expansion of existing campuses, increase in accommodation and the set up of COVID-19 related curriculum will allow CEG to realise higher revenue per student.


China Education Group (839 HK): Solidifying Investment Thesis After Placement

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

Index Rebalance

Brilliance China Automotive / Index Rebalance

<ul>
<li>We see 44 potential adds (including plenty of new listings) and 19 potential deletes (on market cap, liquidity and suspension) for the Hang Seng Composite Index in March.</li>
<li>We expect 37 stocks to be added to Southbound Stock Connect following the rebalance while 37 stocks could be deleted from the trading link and become Sell-only. </li>
<li>There are stocks that have a very high percentage of holdings via Stock Connect and there could be some unwinding prior to the stocks becoming Sell-only.</li>
</ul>


We see 44 potential adds (including plenty of new listings) and 19 potential deletes (on market cap, liquidity and suspension) for the Hang Seng Composite Index in March.
We expect 37 stocks to be added to Southbound Stock Connect following the rebalance while 37 stocks could be deleted from the trading link and become Sell-only. 
There are stocks that have a very high percentage of holdings via Stock Connect and there could be some unwinding prior to the stocks becoming Sell-only.


HSCI Index Rebalance Preview and Stock Connect: A Lot of Change

China

China Kepei Education Group provides private vocational education services, offering profession-oriented and vocational education across engineering, economics, management, education, and art majors. The company operates degree-granting undergraduate institutions and secondary vocational schools, alongside services like consulting and technical training. It was founded in 2000 and is headquartered in Zhaoqing, People's Republic of China.

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China Kepei Education Group (1890 HK)

China East Education (667 HK): Getting More Interesting

China East Education is debt-free with strong net cash. Earnings have stabilised, and it faces fewer regulatory risks. It is a potential...

Osbert Tang, CFA

China Education Group (839 HK): Not so Encouraging in the near Term

CEG is facing challenges from higher USD interest rates, reduced capitalised interest, and write-offs. Despite a 17.8% increase in new students,...

Osbert Tang, CFA

China Yuhua Education (6169 HK): Issues Are Not over Yet

Despite avoiding default on CBs, Yuhua still faces challenges from cash management, no near-term dividend payout, availability of CB refinancing...

Osbert Tang, CFA

China Education Group (839 HK): Solidifying Investment Thesis After Placement

CEG's placement will reduce gearing to 29.2% (including contract liabilities) from 41.7%. Its M&A progress will also benefit from narrowing...

Osbert Tang, CFA

HSCI Index Rebalance Preview and Stock Connect: A Lot of Change

We forecast 44 adds/19 deletes for the HSCI in March leading to 37 adds/deletes for Southbound Stock Connect. There could be more Connect changes...

Brian Freitas

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

China East Education (667 HK): Getting More Interesting

​China East Education is debt-free with strong net cash. Earnings have stabilised, and it faces fewer regulatory risks. It is a potential...

Osbert Tang, CFA

China Education Group (839 HK): Not so Encouraging in the near Term

​CEG is facing challenges from higher USD interest rates, reduced capitalised interest, and write-offs. Despite a 17.8% increase in new students,...

Osbert Tang, CFA

China Yuhua Education (6169 HK): Issues Are Not over Yet

Despite avoiding default on CBs, Yuhua still faces challenges from cash management, no near-term dividend payout, availability of CB refinancing...

Osbert Tang, CFA

China Education Group (839 HK): Solidifying Investment Thesis After Placement

CEG's placement will reduce gearing to 29.2% (including contract liabilities) from 41.7%. Its M&A progress will also benefit from narrowing...

Osbert Tang, CFA

HSCI Index Rebalance Preview and Stock Connect: A Lot of Change

We forecast 44 adds/19 deletes for the HSCI in March leading to 37 adds/deletes for Southbound Stock Connect. There could be more Connect changes...

Brian Freitas

China East Education is debt-free with strong net cash. Earnings have stabilised, and it faces fewer regulatory risks. It is a potential...

CEG is facing challenges from higher USD interest rates, reduced capitalised interest, and write-offs. Despite a 17.8% increase in new students,...