HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<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?

Equity Bottom-Up

Hope Education Group Co Ltd / Equity Bottom-Up

<ul>
<li>Following share price plunge even with decent FY21 result, most of the risks for <a href="https://www.smartkarma.com/entities/hope-education-group-co-ltd" target="_blank" data-smartkarma-citation="entities:27321:1" rel="noopener">Hope Education Group (1765 HK)</a> have been released, but its return profile looks more interesting now.</li>
<li>We see bright spots including good cash flow, solid financial position, positive business outlook, new stock option scheme and limited regulatory exposure the key investment merits. </li>
<li>Valuations appear undemanding at 10.4x and 8.4x PERs for FY21 and FY22. They are at premium to <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> but discount to <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>. </li>
</ul>


Following share price plunge even with decent FY21 result, most of the risks for Hope Education Group (1765 HK) have been released, but its return profile looks more interesting now.
We see bright spots including good cash flow, solid financial position, positive business outlook, new stock option scheme and limited regulatory exposure the key investment merits. 
Valuations appear undemanding at 10.4x and 8.4x PERs for FY21 and FY22. They are at premium to China Yuhua Education (6169 HK) but discount to China Education Group (839 HK). 


Hope Education (1765 HK): Hopeful or Hopeless?

<ul>
<li>
<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> has significantly cleaned up its K-9 business by deconsolidated from FY21 result with a Rmb1.04bn one-off losses. Reported profit, however, still reached Rmb824.5m. </li>
<li>The continuing business achieved a profit of Rmb1.2bn, growing by an estimated 48% YoY, suggesting that the higher and vocational segment is operating on a sound basis. </li>
<li>It is in the process to transform three K-9 schools into higher vocational schools. Guidance for FY22 is not less than 20% earnings growth for the continuing business.  </li>
</ul>



China Yuhua Education (6169 HK) has significantly cleaned up its K-9 business by deconsolidated from FY21 result with a Rmb1.04bn one-off losses. Reported profit, however, still reached Rmb824.5m. 
The continuing business achieved a profit of Rmb1.2bn, growing by an estimated 48% YoY, suggesting that the higher and vocational segment is operating on a sound basis. 
It is in the process to transform three K-9 schools into higher vocational schools. Guidance for FY22 is not less than 20% earnings growth for the continuing business.  


China Yuhua Education (6169 HK): Cleaner After a Big Bath?

<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> again announced solid result with adjusted net profit surged by 57.1% to Rmb1.55bn in FY21, ahead of guidance and also better than market expectations.</li>
<li>Management suggests positive FY22 outlook as student recruitment is encouraging, new schools and campuses add momentum and potential acquisitions provide upside. Unified new student enrollment increased 34% YoY.</li>
<li>CEG stays as our top pick in China Private Education Sector, and its PER of 14.5x for FY22F is undemanding given sustained solid earnings outlook and less regulatory exposure.</li>
</ul>



China Education Group (839 HK) again announced solid result with adjusted net profit surged by 57.1% to Rmb1.55bn in FY21, ahead of guidance and also better than market expectations.
Management suggests positive FY22 outlook as student recruitment is encouraging, new schools and campuses add momentum and potential acquisitions provide upside. Unified new student enrollment increased 34% YoY.
CEG stays as our top pick in China Private Education Sector, and its PER of 14.5x for FY22F is undemanding given sustained solid earnings outlook and less regulatory exposure.


China Education Group (839 HK): Post-FY21 Result Call Suggests Robust Year Ahead

<p>We highlight that <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>, given its focus on vocational training, is an off-target victim of the government's regulations on the Private Education Sector and the "Double Reduction" policies. We think it will ride on government's latest supportive measures on vocational training; and with its schools providing training in culinary arts, IT &amp; Internet Technology and auto services, China East will benefit from the shortage of skills workers in China. Also, unlike K-12 education, private participation in vocational education is very encouraged by the government. </p><p>China East's good post-COVID recovery can be demonstrated by the sharp rebound in student number and stable tuition fees in 1H21. With 90% of students enrolling in long-term program, it has good revenue visibility. We like its sound financial position - Rmb3.5bn net cash, and consideration of shareholder value - bought back nearly 14m shares in Jul and Aug. While valuations are high in absolute terms, China East is clearly another interesting name in the sector after our preferred play <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>.</p>

We highlight that China East Education (667 HK), given its focus on vocational training, is an off-target victim of the government's regulations on the Private Education Sector and the "Double Reduction" policies. We think it will ride on government's latest supportive measures on vocational training; and with its schools providing training in culinary arts, IT &amp; Internet Technology and auto services, China East will benefit from the shortage of skills workers in China. Also, unlike K-12 education, private participation in vocational education is very encouraged by the government. China East's good post-COVID recovery can be demonstrated by the sharp rebound in student number and stable tuition fees in 1H21. With 90% of students enrolling in long-term program, it has good revenue visibility. We like its sound financial position - Rmb3.5bn net cash, and consideration of shareholder value - bought back nearly 14m shares in Jul and Aug. While valuations are high in absolute terms, China East is clearly another interesting name in the sector after our preferred play China Education Group (839 HK).

China East Education (667 HK): Riding on Government's Push for Vocational Schools

Hong Kong

Hope Education Group Co, Ltd. offers educational services. The Company provides educational training, knowledge point sharing, activities arrangement, and other services. Hope Education Group offers its services throughout China.

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Hope Education Group Co Ltd (1765 HK)

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

Hope Education (1765 HK): Hopeful or Hopeless?

With a focus on higher education, Hope Education should see lesser regulatory risks. Good cash flow, solid financial position and positive business...

Osbert Tang, CFA

China Yuhua Education (6169 HK): Cleaner After a Big Bath?

A massive cleanup of K-9 segment should clear many uncertainties from the government's regulations. Focusing on higher and vocational colleges will...

Osbert Tang, CFA

China Education Group (839 HK): Post-FY21 Result Call Suggests Robust Year Ahead

After beating expectation in FY21 result, positive outlook will extend into FY22 as student recruitment is encouraging, new schools and campuses...

Osbert Tang, CFA

China East Education (667 HK): Riding on Government's Push for Vocational Schools

China East should benefit from the government's push on vocational education and its businesses have less regulatory risks. The net cash position...

Osbert Tang, CFA

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