Daily Consumer: New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside and more

In this briefing:

1. New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside
2. Meet, Beat or Miss Q4 Estimates, Both Las Vegas Sands and Sands China Are Solid Bets
3. Maoyan Entertainment IPO Valuation: Press the Skip Button
4. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido
5. Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns

1. New Oriental (EDU): Do Not Fear Q2 Record Losses, 27% Upside

• The record net losses were mainly due to a seasonally weak quarter and recognition of the impairment in a subsidiary.
• Q2 revenues did not slow down and management does not believe Q3 revenues will slow down.
• EDU will not be negatively impacted by the new law from the Ministry of Education.
• The P/E band suggests an upside of 27% and a price target of USD90.

2. Meet, Beat or Miss Q4 Estimates, Both Las Vegas Sands and Sands China Are Solid Bets

• LVS shot at Japan license enhanced by his role in lobbying US Justice Department’s reverse opinion on online gambling published last week. Read why in this insight.
• Owning Sands China makes a strong case based on an ROCE analysis vs. the hospitality sector.
• Owning both at current trade is one of the screaming bargains in the entire sector

3. Maoyan Entertainment IPO Valuation: Press the Skip Button

Maoyan Entertainment (EPLUS HK) is the largest online movie ticketing service provider in China. The mid-point of Maoyan’s IPO price range of HK$14.8-20.4 per share implies a market value of $2.5 billion (HK$19.8 billion). Five cornerstone investors have agreed to buy $30 million or 10% of the offering at the IPO mid-point. The cornerstone investors are Imax China Holding (1970 HK), Hylink Digital Solutions, Prestige of The Sun, Welight Capital and Xiaomi Corp (1810 HK). 

4. Korean Stubs Spotlight: A Pair Trade Between Amorepacific Group & Shiseido

In this report, we provide an analysis of our pair trade idea between Amorepacific Group (002790 KS) and Shiseido Co Ltd (4911 JP). Our strategy will be to long Amorepacific Group (APG) and short Shiseido. As mentioned in our report, Korean Stubs Biweekly Sigma σ (#1): The Inaugural Edition, our base case strategy is to achieve gains of 8-10% on this pair trade. Our risk control is to close the trade if it generates 4-5% in combined losses. Cost of commissions are not included in the calculations and closing prices as of January 23rd are used in our pair trade. [Long APG – $0.5 million; Short Shiseido – $0.5 million for total of $1.0 million].

The following are the major catalysts that could boost APG shares higher than Shiseido shares within the next six to twelve months: 

• Amorepacific Group shares are extremely oversold and forming a base
• THAAD is no longer an issue
• Amorepacific Group’s NAV discount 
• Attractive relative valuations
• Amorepacific’s new headquarters building distraction out of the way
• Chinese tourists are coming back to Korea & slower growth rate of visitors to Japan

5. Hujiang Education (沪江教育) Pre-IPO – Spending More than It Earns

Hujiang Education (1414698D CH) (HET) is planning to raise US$200m in its upcoming IPO.

HET has grown its revenue at an impressive 73% CAGR from 2015 to 2017 and has been accompanied by gross margin expansion. The strong growth was supported by improving operating metrics such as an increase in student enrollment and average spending. 

However, HET has been making losses and continues to spend more than its net billing. It is unclear whether HET had already achieved break even for its proprietary courses before expanding into its CCtalk platform. But from its high level of expenses, it seems unsustainable for HET to be relying heavily on the sales and marketing spending to get users to purchase online courses.

In this insight, we will look into the company’s financial and operating performance, regulatory risks regarding K12 courses, aggressive spending on sales and marketing, and the performance of other online education companies.