ChinaDaily Briefs

China: New Oriental Education, Tencent, Gaotu Techedu, DiDi Chuxing, FTSE China A50 Index, Nongfu Spring, Li Auto Inc., TAL Education, Acotec Scientific Holdings and more

In today’s briefing:

  • China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?
  • Tencent Support Break
  • As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?
  • Didi Global – Greed Is Not Always Good
  • Chinese Equity Markets: Supports Crack
  • Full Circulation Of H-Shares: July 2021 Update
  • Li Auto HK Listing – Needs to Be Done at Discount Given XPeng’s Poor Debut
  • TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”
  • Acotec (先瑞达) Pre-IPO: Thoughts on Valuation
  • Li Auto Secondary Listing: Volts Wagons

China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?

By Travis Lundy

On Friday 23 July, the 21st Century Business Herald and Bloomberg followed up one stories which had come out a couple of days earlier (which suggested much more regulation on after-school tutoring businesses), suggesting that China would possibly ban for-profit businesses which tutored China’s K-12 students on school curriculum subjects. The same articles Friday suggested no listed businesses would be able to purchase or invest in such businesses, and foreign capital would not be allowed to invest in the businesses.

This was discussed pre-US open in China After School Tutoring Online Education Stocks Crushed – Investors Schooled. This seemed dramatic, and possibly dire. Stocks in the K-12 education sector in Hong Kong fell dramatically. Stocks listed in the US fell even more. A custom index of 16 names fell nearly 30%. An index of just the three major US-listed names – TAL Education (TAL US), Gaotu Techedu (GOTU US), and New Oriental Education (EDU US) – was down 60% pre-open.

That wasn’t enough as the basket closed 6% lower from there. 

It looks like even that may not have been enough.

The NEW News

On Saturday, the State Council followed up with a document“Opinions on Further Reducing the Workload of Students and The Burden of Out-of-School Training in the Compulsory Education Stage”

The Opinion is a wide-ranging polemic with instructions to local governments, school systems, educational authorities, etc to deal with the reduction of “double burden” on kids and parents of school system and after-school tutoring system on the same subjects as taught in the school system. There is lots of content suggesting significant detail on things like homework in regular school, who is to be given how much, how much they are not to do, what school administrators in the public school system should do to organise after-school and summer programs. 

There are, of course, the sections about the after-school tutoring businesses – strictly enforcing regulations, ensuring proper qualifications, and severely punishing those institutions which fall short, especially those with a profit incentive. 

If I were in that business, I would stop making a profit immediately. I would refund payments for currently in-progress classes so that the only payments related to teacher payments and bare minimum support costs are done. I would provide refunds to anyone who would take them so as to immediately cease the business. 

Some businesses may be able to pivot. Some may be liquidation candidates. Some will simply be shut down to take the loss. 

But this is a big change, and it has been out there. And it looks like when people did not see it quickly enough, it was decided Something Must Be Done. Now it is going to be done.

Tencent Support Break

By Thomas Schroeder

Tencent short call from 620 targeted 560 and the break below 560 set in motion a fresh sell signal that is showing increasing bear pressure below recent support  at 510 with 410/20 the next major support zone in our cross hairs.

Today’s gap is important if we cannot muster an uptick to close or partially close, we will head lower with higher momentum.

RSI is nearing oversold levels and due to bottom Tuesday or Wednesday and bounce into late July ahead of a more turbulent August cycle.

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

By Shifara Samsudeen, ACMA, CGMA

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.

Didi Global – Greed Is Not Always Good

By Kirk Boodry

The more news that comes out, the worse it seems to get for Didi Global. A coalition of regulators descended on Didi headquarters last Friday as the company’s decision to go public despite Cyberspace Administration (CAC) admonishments it should wait have been taken as a challenge to the government. We expect management saw an opportunity to grab a high valuation with super Q1 numbers which in turn was sweetened by a lucrative options award and that may have made them complacent. We don’t know where regulators will take this but we do feel confident in saying that there are no quick fixes here – too many regulators are involved now and it will likely take months for the company to get out from under this level of scrutiny.

Chinese Equity Markets: Supports Crack

By Shyam Devani

Price action on Chinese equity markets at the start of this week now raise eyebrows as the FTSE China A50 Index shows clear risk of further losses while the Shanghai Composite is testing pivots.

Whether this translates to CNH weakness is not clear.

Full Circulation Of H-Shares: July 2021 Update

By David Blennerhassett

This is the latest update in a series dating back to Legend’s Conversion of Domestic Shares in June 2018.

To date, 28 companies have sought approval to convert their domestic shares and/or unlisted foreign shares into H shares, which would then be eligible to be listed and traded on Hong Kong’s stock exchange.

16 companies have now been given CSRC and Hong Kong listing approval to convert such shares. Five of those have seen various degrees of movement in the converted shares.

Sichuan Languang Justbon Service Group (2606 HK) received approval late last year but did not convert – and was subsequently subject to an Offer. 

To date, two companies have withdrawn their application to convert their domestic shares.  Both of these companies have now been subject to Offers.

As always, more below the fold. 

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

By Ming Lu

  • 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.

Acotec (先瑞达) Pre-IPO: Thoughts on Valuation

By Ke Yan, CFA, FRM

Acotec, a leading China-based peripheral-vascular interventional device company, is looking to raise up to USD 300m via a Hong Kong listing.  

In our previous note, we looked at two core drug coated balloon products of the company, namely the AcoArt Orchid & Dhalia for the above the knee artery stenosis and AcoArt Tulip & Litos for the below the knee stenosis. Both AcoArt Orchid & Dhalia, and AcoArt Tulip & Litos reported efficacy that could be potentially better than its benchmark product. Thanks to its early mover advantage, the AcoArt Orchid & Dhalia had a dominant market share. The main growth driver of the company’s core product will be increasing penetration rate and indication expansion. Besides the DCB products, we think the company’s product pipeline is not exciting. The company has a good management team but the pre-IPO investors are overall mediocre.

In this note, we will provide our thoughts on the company’s valuation.

Li Auto Secondary Listing: Volts Wagons

By Arun George

Li Auto Inc. (LI US) is the first company to successfully commercialise EREVs (extended-range electric vehicles) in China, the Li ONE. Li ONE is a six-seat, large premium electric SUV which began volume production and deliveries in November 2019 and December 2019, respectively. In 2020, Li ONE was the best-selling new energy SUV in China with a sales volume market share of 9.7%, according to CIC. 

Li Auto has received approval for an HKEx secondary listing to raise $1.0-1.5 billion, according to press reports. The secondary listing comes on the back of a listing on Nasdaq in July 2020 ($1.0 billion net raise at $11.50 per ADS) as well as a follow-on offering in December 2020 ($1.4 billion gross raise at $29.00 per ADS). The secondary listing also follows peer, Xpeng (XPEV US), which raised net proceeds of $1.8 billion on 7 July. XPeng (9868 HK) H-shares are trading -9% below the offer price largely due to the recent regulatory onslaught which has engulfed Chinese companies with exposure to the technology and education sector along with listing in the US. 

Despite rising competition from new entrants, Li Auto is delivering on its IPO promise by maintaining a market-leading share in its niche, investing in a roadmap to reduce its single model reliance, a positive gross margin and cash generation trajectory. On balance, for investors willing to brave the current regulatory-driven weak sentiment on Chinese names, Li Auto’s fundamentals and valuation are attractive, in our view. 

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