Daily BriefsEvent-Driven

Event-Driven: New Oriental Education, Softbank Group, Gaotu Techedu, SK IE Technology, Nongfu Spring, Barito Pacific, Roland Corp, alstria office reit-ag and more

In today’s briefing:

  • China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?
  • JAPAN PASSIVE: Who Owns What 2021?
  • As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?
  • MSCI Standard Korea QIR Adds: SKIET & Ecopro BM Exit Points
  • Full Circulation Of H-Shares: July 2021 Update
  • LQ45 Index Rebalance: BRPT, TINS In; BTPS, CTRA Out
  • Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages
  • Brookfield/Alstria Office REIT: Potential Takeover

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.

JAPAN PASSIVE: Who Owns What 2021?

By Travis Lundy

A few years ago I started this series, and I updated it last year. Since last year, it has been a top 10 insight in terms of views. 

I personally think it is important for investors of all types to understand WHO OWNS WHAT. 

Many fundamental investors are reticent to spend any time on this but there are many reasons why active investors in Japan should be interested in understanding the ownership and shareholder dynamics of passive investors in Japan.

Some of the places active investors will see their influence are:

  • Stories intermittently published about the BOJ’s presence in Japanese ETFs (especially the fact that it owns 85+% of the outstanding ETF market),
  • Relatively constant interest in Nikkei 225 rebalances like the one we saw in July 2020, which helped push up Japan Exchange Group (8697 JP) by 30+% from May to July, then helped it slide 13% in a week, or the changes in the Nikkei 225 review rules published earlier this year which may change what happens this September to a few large caps, and the announcement of the BOJ that it would no longer buy Nikkei 225 ETFs which started a long slide in Fast Retailing (9983 JP) shares against comps and the Nikkei itself. Long “held up” by ‘market inventory’ and Nikkei 225 ETF buying, when the BOJ stopped, it removed the cushion and existing inventory holders had to sell out. 
  • Then if you look at the shareholder structure of Fast Retailing today, you will see that it is STILL fundamentally a serious problem for large foreign active investors who would actually wish to take an active (but not activist) position. Real World Float on the stock is, by my calculation, less than 15% of shares outstanding. 
  • The relatively recent policy of increased stewardship regarding the passive management portion of the GPIF (the Government Pension Investment Fund) – an investing heavyweight in Japan.
  • The timing and quantum of after-event support or overhang on corporate actions such as buybacks, secondary offerings, primary offerings, mergers, etc. 
  • Index inclusions mean big flows. If you follow the insights on TOPIX Inclusions by Janaghan Jeyakumar, CFA and myself, you will often see big moves. Sometimes these stocks move 50% between when we write about them and when they go into the index. If you own them and are considering an exit, you need to know when to take profits, and the dynamic of the liquidity. If you are thinking about getting in for fundamental reasons, it pays to know early so you can get ahead of the major flow.
  • The return of Toshiba Corp (6502 JP) to the TSE First Section in Q1 this year changed the foreign shareholder percentage ownership, lowering it by 10%. Smartkarma readers knew this last year and in January, which prepared them for the June AGM when the shareholder category ownership was released.
  • The changes to the TSE’s market structure, which will affect TOPIX membership, which will affect many companies’ issuance, buyback, share cancellation, etc decisions over the next several months. They are doing this because of the TSE Prime listing rules which will effectively also determine whether or not they will be included in TOPIX in future, or whether they will fall out of TSE Prime and will see constant selling over late 2022 to early 2025. 

Of course, TOPIX is just over half of the passive tracking AUM in Japan. There’s more. 

Find out WHO OWNS WHAT in Japan Passive below the fold. 

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.

MSCI Standard Korea QIR Adds: SKIET & Ecopro BM Exit Points

By Sanghyun Park

SKIET and Ecopro BM, two stocks most likely to be included in MSCI Standard Korea’s August QIR, are continuing to rise. Today alone, SKIET is up 4.25%, and Ecopro BM is up by a whopping 7.56%.

Today is day 6 of our 10-day review period. Assuming the market cap cutoff of this QIR is US$2.8B, both stocks have exceeded the full market cap and float-adjusted market cap thresholds on all 6 trading days.

AdditionsSK IE Technology Co LtdEcopro BM Co Ltd
Float rate20.00%50.00%
Beat the threshold by % – full market cap
7. 19159.55%9.56%
7. 20163.24%1.54%
7. 21165.70%1.95%
7. 22183.53%0.56%
7. 23189.68%3.01%
7. 26203.21%9.29%
Beat the threshold by % – float-adjusted market cap
7. 193.82%9.56%
7. 205.29%1.54%
7. 216.28%1.95%
7. 2213.41%0.56%
7. 2315.87%3.01%
7. 2621.29%10.54%
Source: KRX & Clepsydra Capital

Although there remains an uncertainty risk for Ecopro BM’s float rate (estimated at 50%), it is likely that these two stocks will be included in the MSCI Standard this time.

The passive impact wouldn’t be small. SKIET should expect 1.51x its ADTV with an estimated index weight of 0.27%. Ecopro BM will likely see an even more substantial passive inflow, estimated at 1.81 times the ADTV, with an estimated index weight of 0.23%.

Passive inflowSK IE Technology Co LtdEcopro BM Co Ltd
30-day average daily trading volume717,466396,180
– Value₩145.0B₩99.8B
Total estimated passive funds mirroring MSCI Korea₩80,000.0B₩80,000.0B
Float-adjusted market cap₩3,493.6B₩2,882.3B
Estimated weight in MSCI Korea0.27%0.23%
Estimated passive inflow₩218.3B₩180.1B
Estimated passive inflow/ADTV1.51x1.81x
Source: KRX & Clepsydra Capital

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. 

LQ45 Index Rebalance: BRPT, TINS In; BTPS, CTRA Out

By Brian Freitas

The LQ45 Index is a market cap weighted index of the 45 most liquid stocks listed on the Indonesia Stock Exchange (IDX). The LQ45 Index covers at least 70% of the stock market capitalization and transaction values in the Indonesia Stock Market.

The IDX has announced the changes to the LQ45 Index as a part of the August review. Barito Pacific (BRPT IJ) and Timah Persero (TINS IJ) have been added to the index while Bank BTPN Syariah (BTPS IJ) and Ciputra Development (CTRA IJ) have been deleted from the index.

We expect the impact of passive funds (and active funds) will be quite high on Barito Pacific (BRPT IJ), Bit Digital (BTBT US) and Ciputra Development (CTRA IJ) and significantly lower on Timah Persero (TINS IJ).

The changes are effective after the close of trading on 30 July, so there are only 4 trading days before passive funds have to rebalance their portfolios. Active funds benchmarked to the LQ45 index will also trade over the next few days so as not to deviate too far from their benchmark.

Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages

By Oshadhi Kumarasiri

Roland Corp (7944 JP), a global leader in the electronic musical instruments industry, has been shifting production away from China and Japan to concentrate most of the production activities to the Malaysian plant established in 2014 as a part of the business turnaround process that followed a vicious downward spiral in the post-global financial crisis (GFC) environment.

While demand for musical instruments soars across the world, COVID-19 lockdowns in Malaysia continues to affect Roland’s production capabilities. We believe Roland may fail to meet demand amidst disruptions to the main production facility in Malaysia while Yamaha Corp (7951 JP) seems to be well placed to outperform the market through capturing Roland’s lost demand.

Brookfield/Alstria Office REIT: Potential Takeover

By Jesus Rodriguez Aguilar

On 21 July, Bloomberg reported that Canadian Brookfield Asset Management-Cl A (BAM/A CN) was working with advisers as it considers a potential bid for alstria office reit-ag (AOX GR). alstria office’s shares jumped on the news and closed 9% higher. A buyout of the company would be the biggest take-private deal in Germany in 2021. On the same day, alstria stated it “takes note of the press rumours with respect to a potential takeover offer by Brookfield Asset Management Inc.”.

The interest of Brookfield in alstria is a bet on German office market recovery. The portfolio of alstria should hold well in value vis-à-vis any further waves of the pandemic. Moreover cash flows are stable as alstria is mainly exposed to public sector tenants with long-term leases and it has stable occupancy rates.

Before the pandemic, alstria used to trade at a premium to BV, as of 23 July, it traded at 0.94x, and it is showing a remarkable recovery since the lows of November 2020, driven by vaccination campaigns and the soon-to-happen “back-to-office”.

On 4 March 2021, S&P upgraded Alstria to BBB+ (outlook stable) on sustained low debt leverage (low ratio of debt to debt plus equity of 27.6%), material share of public tenants and long lease maturity profile and robust liquidity profile.

A takeout price could come in at €18.68, 10% premium over the last reported EPRA NTA and 6.4% premium to the closing price on 23 July. My PT is economic-profit based and equates to a 1% discount to EPRA NTA 22e (source Capital IQ consensus). alstria trades at 3.5% FFO yield. and 3% dividend yield.

German property values continue to increase. The ECB does not seem worried about inflation as long as the delta variant is spreading and will not stop its debt purchasing program in the short term, therefore monetary policy will likely remain unchanged.

Recommendation is Long AOX GR, PT €18.68.

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