China and US Equity Analyst

Roger Xie

Cross Asset Strategy

<ul>
<li>China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. <a href="https://www.smartkarma.com/entities/hang-seng-tech-index" target="_blank" data-smartkarma-citation="entities:31367:1" rel="noopener">Hang Seng Tech Index (HSTECH INDEX)</a> has declined 40% from its high in February this year.</li>
<li>In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a> as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. </li>
<li>China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.</li>
</ul>


China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. Hang Seng Tech Index (HSTECH INDEX) has declined 40% from its high in February this year.
In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit HKEX (388 HK) as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. 
China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.


China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

Research on Tech Companies

Evelyn Zhang

Thematic (Sector/Industry)

<p>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.</p>

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

Investment Advisors, JL Warren Capital

Junheng Li

Investment Advisors

JL Warren Capital

JL Warren Capital LLC is a leading independent equity research firm focused on Chinese companies and listed multinationals in China. We employ a bottom-up research approach that takes great care to avoid the acquisition of material non-public information. Through investigative due diligence including channel surveys and interviews, our research helps clients to pinpoint the dislocations in the market.

<p><em>In CY 2018 private AST operators responded to the regulatory tightening by swiftly reigning in their capacity expansions. In July 2018 <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>  guided ~27% and ~45% YoY topline YoY growth in the following summer semesters (August Q 2018, FQ2 19 for TAL, FQ1 19 for EDU), decelerating from 44% and 71% YoY growth in FQ1 2019 ended May 2018, respectively.  Both stocks were massively sold off:  TAL declined by 51% from then all-time high of 47 USD in June to 23 USD in October 2018.   During the same period, EDU dropped 50% from then all-time high of 105 USD (before 10 for 1 stock split on March 2021) in June 2018 to 52 USD in December 2018.   Nevertheless, since then EDU and TAL delivered 198% and 164% return since the beginning of 2019. </em></p>

In CY 2018 private AST operators responded to the regulatory tightening by swiftly reigning in their capacity expansions. In July 2018 New Oriental Education (EDU US)  and TAL Education (TAL US)  guided ~27% and ~45% YoY topline YoY growth in the following summer semesters (August Q 2018, FQ2 19 for TAL, FQ1 19 for EDU), decelerating from 44% and 71% YoY growth in FQ1 2019 ended May 2018, respectively.  Both stocks were massively sold off:  TAL declined by 51% from then all-time high of 47 USD in June to 23 USD in October 2018.   During the same period, EDU dropped 50% from then all-time high of 105 USD (before 10 for 1 stock split on March 2021) in June 2018 to 52 USD in December 2018.   Nevertheless, since then EDU and TAL delivered 198% and 164% return since the beginning of 2019. 

China’s Congress on AST Industry Oversight: Mostly Rhetoric, Little Practicality

Managing Director, Zero One, Zero One

Vincent Fernando, CFA

Managing Director, Zero One

Zero One

Founded in 2015, Zero One produces independent investment research and provides corporate finance advisory services with a focus on both listed and private technology companies. Founder Vincent Fernando has over 20 years of experience in US and Asia capital markets.

Independent Investment Research

<div class="content-highlight"><h2>Huya Merger News Propels Stock Upwards; Tencent Gains Subdued from Rising US-China Tensions</h2></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/594/original/China%20Portfolio%20Performance.png?1597832603" class="editor-image img-responsive" data-smartkarma-image-id="153594"></figure><p>The months of July and August saw a broad level rise in prices across our entire China tech portfolio. While companies like Huya and Niu outperformed the MSCI China and NASDAQ indices, companies like Tencent remained relatively subdued given rising US-China tensions on mobile app bans.</p><p>We observe that China Tech companies appear to be looking inwards for growth - focusing more on domestic opportunities while the international regulatory outlook remains uncertain.</p><p>We provide updated views on each of our portfolio companies below:</p>

Huya Merger News Propels Stock Upwards; Tencent Gains Subdued from Rising US-China TensionsThe months of July and August saw a broad level rise in prices across our entire China tech portfolio. While companies like Huya and Niu outperformed the MSCI China and NASDAQ indices, companies like Tencent remained relatively subdued given rising US-China tensions on mobile app bans.We observe that China Tech companies appear to be looking inwards for growth - focusing more on domestic opportunities while the international regulatory outlook remains uncertain.We provide updated views on each of our portfolio companies below:

Our Tech Portfolio Update: Capitalizing on Domestic Opportunities Amidst Heightened US-China Tension

<div class="content-highlight"><h2>Niu Soars as Market Finally Appreciating EV Micromobility Amidst COVID; Momo Loses Ground to Competitors</h2></div><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/143/650/original/01%20Portfolio%20-%20June%2030.png?1593530582" class="editor-image img-responsive" data-smartkarma-image-id="143650"></figure><div class="content-caption">Source: Capital IQ, Zero One</div><p>The months of May and June saw a broad-level recovery in asset prices as both the NASDAQ index and MSCI China index rose by ~12% since our last update on May 5 (<a href="https://www.smartkarma.com/insights/our-tech-portfolio-update-maintain-overweight-on-digital-structural-trends-are-accelerating" target="_blank" data-smartkarma-citation="insights:39068" rel="noopener">Our Tech Portfolio Update: Maintain Overweight on Digital; Structural Trends Are Accelerating</a>).</p><p>Our China tech portfolio significantly outperformed the broader market as COVID winners reaped their rewards. We provide our updated views on each of our holdings below.</p>

Niu Soars as Market Finally Appreciating EV Micromobility Amidst COVID; Momo Loses Ground to CompetitorsSource: Capital IQ, Zero OneThe months of May and June saw a broad-level recovery in asset prices as both the NASDAQ index and MSCI China index rose by ~12% since our last update on May 5 (Our Tech Portfolio Update: Maintain Overweight on Digital; Structural Trends Are Accelerating).Our China tech portfolio significantly outperformed the broader market as COVID winners reaped their rewards. We provide our updated views on each of our holdings below.

Our Tech Portfolio Update: COVID Winners Reaping Rewards, Niu Soars 80%+

China

Youdao, Inc. develops and markets mobile internet applications. The Company provides language translation applications, personal cloud applications, e-commerce shopping applications, and other related products. Youdao also develops investment related applications.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Youdao, Inc. (DAO US)

China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

We remain sanguine on China equity market outlook in 2H 2021 given the earning growth and plenty liquidity, but would wait for more clarity on...

Roger Xie

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

China’s Congress on AST Industry Oversight: Mostly Rhetoric, Little Practicality

The crackdown on irregular AST businesses, if seriously implemented, will wipe out small operators (mostly mom and pops), and leave the big ones...

JL Warren Capital

Our Tech Portfolio Update: Capitalizing on Domestic Opportunities Amidst Heightened US-China Tension

Huya Merger News Propels Stock Upwards; Tencent Gains Subdued from Rising US-China TensionsThe months of July and August saw a broad level rise in...

Vincent Fernando, CFA

Our Tech Portfolio Update: COVID Winners Reaping Rewards, Niu Soars 80%+

Niu Soars as Market Finally Appreciating EV Micromobility Amidst COVID; Momo Loses Ground to CompetitorsThe months of May and June saw a...

Vincent Fernando, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)