HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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. 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>.

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

We take the recent newsflow on business development at <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> positively. While the market may still skeptical towards the company due to the sector's regulatory worries, CEG is standing in a better position than many of its peers given its focus on the vocational and higher education segment. In our view, the beaten-down performance of CEG's share price is not justified, and it is an interesting time to look at its long-term promising outlook now.   The 58% increase in approval higher education enrollment quota for 2021/2022 academic year, upside from contribution of the newly added Chengdu Jincheng College, support from banks and IFC through provisions of seven-year loan facilities at low pricing, rapid execution of M&amp;A and further potential pipeline acquisitions all lend support to CEG's business prospects amid a turbulent time. Our belief is that at 13.5x PER for FY22, CEG is inexpensively priced relative to growth.

We take the recent newsflow on business development at China Education Group (839 HK) positively. While the market may still skeptical towards the company due to the sector's regulatory worries, CEG is standing in a better position than many of its peers given its focus on the vocational and higher education segment. In our view, the beaten-down performance of CEG's share price is not justified, and it is an interesting time to look at its long-term promising outlook now.   The 58% increase in approval higher education enrollment quota for 2021/2022 academic year, upside from contribution of the newly added Chengdu Jincheng College, support from banks and IFC through provisions of seven-year loan facilities at low pricing, rapid execution of M&amp;A and further potential pipeline acquisitions all lend support to CEG's business prospects amid a turbulent time. Our belief is that at 13.5x PER for FY22, CEG is inexpensively priced relative to growth.

China Education (839 HK): More Flows of Positive Development

Forensic Analyst

Jason Yap, CFA

Forensic Accounting

The “double reduction” crackdown on K9 after school tutoring ("AST") that covers primary and middle school curriculums has inflicted major pain on the USD38 billion industry. With the original aim of easing student pressure inside and outside school, it has led to unintended consequences of tutor layoffs, early lease terminations, and fresh anxiety among parents on how to occupy their children's available after school time.
The regulations also shook the confidence of AST investors and enterprises. Weak hands folded by shutting operations, filing for bankruptcy and/or exiting investments while industry leaders with a stronger cash position frown over the best approach to pivot operations.
For industry leaders like <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> and <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>, revenues generated from K9 academic tutoring comprise between 50% to 80% of total revenues. Hence, there is a direct material impact on forward revenue and earnings.  In addition, they will incur one-time costs for, amongst others, staff severance, early lease terminations, and refund liabilities for K9 courses that can no longer be administered.  
In August 2021, Beijing education authorities <a href="https://www.caixinglobal.com/2021-08-16/cover-story-whats-next-for-chinas-after-school-tutoring-industry-101755589.html" target="_blank" rel="noopener">extended</a> an olive branch, highlighting that AST companies may switch to sectors that aren’t affected by the new regulations, such as high school tutoring, vocational education, all-round education and adopting hybrid business models. A similar stance might by adopted nationwide and signals (at least some) policy support for the embattled AST sector.
Using TAL Education as a bellwether for the AST sector, we examine the financial and accounting concerns that arise as a direct result of the new regulations. In addition, we analyse the recent exit of a key Convertible Notes investor, who has essentially capitulated in the face of execution uncertainties of TAL's pivot strategy.  Should other investors follow?

The “double reduction” crackdown on K9 after school tutoring ("AST") that covers primary and middle school curriculums has inflicted major pain on the USD38 billion industry. With the original aim of easing student pressure inside and outside school, it has led to unintended consequences of tutor layoffs, early lease terminations, and fresh anxiety among parents on how to occupy their children's available after school time.
The regulations also shook the confidence of AST investors and enterprises. Weak hands folded by shutting operations, filing for bankruptcy and/or exiting investments while industry leaders with a stronger cash position frown over the best approach to pivot operations.
For industry leaders like New Oriental Education (EDU US) and TAL Education (TAL US), revenues generated from K9 academic tutoring comprise between 50% to 80% of total revenues. Hence, there is a direct material impact on forward revenue and earnings.  In addition, they will incur one-time costs for, amongst others, staff severance, early lease terminations, and refund liabilities for K9 courses that can no longer be administered.  
In August 2021, Beijing education authorities extended an olive branch, highlighting that AST companies may switch to sectors that aren’t affected by the new regulations, such as high school tutoring, vocational education, all-round education and adopting hybrid business models. A similar stance might by adopted nationwide and signals (at least some) policy support for the embattled AST sector.
Using TAL Education as a bellwether for the AST sector, we examine the financial and accounting concerns that arise as a direct result of the new regulations. In addition, we analyse the recent exit of a key Convertible Notes investor, who has essentially capitulated in the face of execution uncertainties of TAL's pivot strategy.  Should other investors follow?

TAL Education - Key Investor Capitulates, Should the Rest Follow?

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

<ul class="">
<li>The new rule for tutoring school damaged the prices of Chinese education equities.</li>
<li>The market focuses on the “non-profit” requirement, but we believe “Article 13” is more important.</li>
<li>We believe the authorities try to block all the ways that a tutoring school can continue.</li>
<li>We do not believe this is a “low-price opportunity” after the stock price plunge.</li>
<li>Please also see <a href="https://www.smartkarma.com/insights/tal-education-tal-last-summer-for-physical-tutoring-school" target="_blank" data-smartkarma-citation="insights:53714" rel="noopener">TAL Education (TAL): Last Summer for Physical Tutoring School</a> on June 28 before the price plunge.</li>
</ul>


The new rule for tutoring school damaged the prices of Chinese education equities.
The market focuses on the “non-profit” requirement, but we believe “Article 13” is more important.
We believe the authorities try to block all the ways that a tutoring school can continue.
We do not believe this is a “low-price opportunity” after the stock price plunge.
Please also see TAL Education (TAL): Last Summer for Physical Tutoring School on June 28 before the price plunge.


TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”

Equity Analyst, LightStream Research

Shifara Samsudeen, FCMA, CGMA

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Event-Driven

China’s new rules and regulations in private tutoring have triggered a massive sell-off in the education companies including <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> , <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> and <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> . The new rules announced by Beijing include turning after-school tutoring companies (tutoring on school curriculum) into not-for-profit which would prevent online tutoring platforms from raising foreign capital and at the same time seeking public listing. After-school tutoring is in huge demand in China and soaring tuition fees have become a huge burden on parents and the government of China is attempting to reduce the cost of education in order to encourage couples to have more kids as education accounts for a large share of childcare in China.Similarly, private tutoring in India is in huge demand as a large majority of K-12 school students in the country attend after-school tutoring. Known as tuition culture, it has been prevalent in India for decades which supplements the school education of children. In this insight, we examine the private tutoring market in India (including online) and the likelihood of similar directives (to that of China) and how it could impact the fundamentals and valuations of online education platforms in the country.

China’s new rules and regulations in private tutoring have triggered a massive sell-off in the education companies including Gaotu Techedu (GOTU US) , New Oriental Education (EDU US) and TAL Education (TAL US) . The new rules announced by Beijing include turning after-school tutoring companies (tutoring on school curriculum) into not-for-profit which would prevent online tutoring platforms from raising foreign capital and at the same time seeking public listing. After-school tutoring is in huge demand in China and soaring tuition fees have become a huge burden on parents and the government of China is attempting to reduce the cost of education in order to encourage couples to have more kids as education accounts for a large share of childcare in China.Similarly, private tutoring in India is in huge demand as a large majority of K-12 school students in the country attend after-school tutoring. Known as tuition culture, it has been prevalent in India for decades which supplements the school education of children. In this insight, we examine the private tutoring market in India (including online) and the likelihood of similar directives (to that of China) and how it could impact the fundamentals and valuations of online education platforms in the country.

As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?

China

TAL Education Group provides educational services. The Company offers comprehensive tutoring services to students covering core academic subjects such as mathematics, English, Chinese, physics, chemistry, political science, history, and biology. TAL Education Group serves students in China.

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TAL Education (TAL US)

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

China Education (839 HK): More Flows of Positive Development

Good enrollment quota growth, confidence from banking community and IFC and rapid execution of M&As are driving FY22 outlook for CEG, and this...

Osbert Tang, CFA

TAL Education - Key Investor Capitulates, Should the Rest Follow?

The “double reduction” crackdown has inflicted major pain on the USD38 billion AST industry. Weak hands have folded but TAL strives to pivot....

Jason Yap, CFA

TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”

The market focuses on the “non-profit” requirement, but we believe “Article 13” is fatal. We believe the authorities try to block all the way that...

Ming Lu

As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?

It seems that India’s edutech sector is poised for more .growth which would possibly make it one of the world’s largest edutech markets

Shifara Samsudeen, FCMA, CGMA

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