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Most Read: Evergrande Real Estate Group, Ping An Insurance (H), TAL Education, SK Telecom, Aventus Group and more

In today’s briefing:

  • Smartkarma Flash Webinar | Evergrande: Quantifying Risks and Potential Domino Effect
  • Ping An A/H: Discount Widens and Diverges from Broader Market
  • China After School Tutoring Online Education Stocks Crushed – Investors Schooled
  • SKT MSCI Downweight Is a Golden Trading Opportunity: Entry/Closing Points Discussion
  • FTSE EPRA NAREIT Asia ADD Basket – More To Go

Smartkarma Flash Webinar | Evergrande: Quantifying Risks and Potential Domino Effect

By Smartkarma Research

Tune in for our Flash Webinar as we look at recent developments at Evergrande Real Estate Group (3333 HK). The highly indebted real estate company saw its share price jump from four-year lows on the resolution of a dispute with a Chinese bank, but trouble for China’s largest property developer seems far from over. Join us for a discussion with Insight Providers Travis Lundy and  Charles Macgregor on the current situation and where the company goes from here.

The flash webinar will be hosted on Friday, 23 July 2021, 4.00pm SGT/HKT.

Travis Lundy has 20+ years of experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies, with most of that time spent managing money.

Charles Macgregor is an industry veteran with over 35 years of experience. As Head of Asia, he is responsible for the Asian credit research product at Lucror, which he joined in 2013. Previously, he had worked for Deutsche Asset Management, where he was Head of Credit Research, Asia-Pacific and Co-Chair of their Global Credit Methodology Committee. He also worked at Moody’s, where he was a Senior Credit Officer and a member of their New Instruments Committee and Symbols & Definitions Committee.

Ping An A/H: Discount Widens and Diverges from Broader Market

By Brian Freitas

The Ping An A-shares Ping An Insurance Group Co Of China (601318 CH) are trading at a 2.75% discount versus the H-shares Ping An Insurance (H) (2318 HK). This continues the cycle of premiums and discounts going back to 2015.

The last time the A-shares traded at a discount to the H-shares was in April this year. By mid May, the A-shares traded at a 5% premium to the H-shares before moving lower again.

With Ping An Insurance Group Co Of China (601318 CH) trading at a 2.75% discount to Ping An Insurance (H) (2318 HK) the risk/reward is favourable to setting up a premium expansion trade. The current discount lies at the 82nd percentile over the last 5 years and the discount has been widening as the premium of the overall market continues to increase.

Northbound holdings of Ping An Insurance Group Co Of China (601318 CH) have increased over the last couple of months, while the Southbound shareholding on Ping An Insurance (H) (2318 HK) has dropped sharply. This implies that mainland China investors have been selling the A-shares a lot more aggressively than the H-shares.

In this Insight, we look at the historical premium for Ping An and compare it to the premium on the AH index and other large caps, and look at some catalysts that could lead to an expansion of the premium.

China After School Tutoring Online Education Stocks Crushed – Investors Schooled

By Travis Lundy

Earlier today, it was reported by the 21st Century Business Herald that China was going to ban IPOs by educational companies and platforms which tutor on subjects in the public school curriculum and ban investments in such companies by those which are already listed. 

Bloomberg reported that China was considering asking companies that offer such tutoring – to help students pass the gaokao – the legendarily difficult college entrance exams – to turn into non-profit businesses. 

The initial story is that online education platforms would not be allowed to raise money in capital markets, sell securities, go public. The bigger picture is that they are effectively being pushed out of business. This particular news has sent education (especially school curriculum tutoring platforms) stocks dramatically lower in Hong Kong trading, and in the US pre-open market.

Drops of 30-50% are par for the course so far.

There is a possibility this kills the entire business for some platforms. 

This comes on the back of a crackdown starting earlier this spring on after-school tutoring platforms after Xi Jinping said in March at the Two Sessions that the practice was a “social problem” affecting kids social and mental health and he urged “resolute rectification.”

Right there, that should have warned everyone this story was not going to have a happy ending. 

This followed a scandal in January where four schools, including Yuanfudao, Zuoyebang, and the education unit all hired the same actress to pose as a teacher in ads for their platform, in at least one video laying the guilt on parents saying if parents didn’t sign up for the streaming courses, it could have consequences, “90% of mothers make mistakes” and “it could be parents themselves who ruin their kids [chances].” In one she was an English teacher with 35 years experience. In another she had been a math teacher all her career. It was not a good look.

The media followed Hi Jinping’s comments with polemics on predatory practices and fear-based advertising, which had gone rampant as the VC investees aimed at growth above all. This put an immediate halt to the preparations many of the mega-tech conglomerates invested in China – Alibaba Group (BABA US), Tencent (700 HK), Softbank Group (9984 JP), and others – had made to list their education-related projects such as Zuoyebang (Alibaba) which raised US$2.35bn in two rounds last year, Yuanfudao (Tencent) which raised US$3.5bn in three rounds, VIPKid (Tencent) which does English teaching, Huohua Siwei (Tencent) which specialises in STEM, and others which were either launching (like ByteDance’s newest effort Dali Education after buying Hua Luogeng math school and renaming it Qingbei Online School, and one-on-one tutoring platform GoGoKid), or preparing themselves to start on the road to IPO or at least looking at a 2022 listing. Zhangmen Education (ZME US) actually IPOed in late May at US$11.51/ADR, rising 50% on Day 1, falling back to US$9.54 yesterday and now down 26% in pre-market. 

Such companies had grown dramatically in 2020 as covid restrictions, or precautions, increased the desire for parents to keep their kids at home. Preqin says VC funding in the sector hit a record $10.5bn in 2020. The market is huge, and growing fast. Online tutoring grew 35-40% last year as covid struck according to iResearch in Shanghai, reaching RMB 257bn. Others have higher numbers. And according to Oliver Wyman and the National Institute of Educational Sciences, the overall market for after-school education was RMB 800bn in 2019, expected to rise to RMB 1.4trln in 2025.

The four major problems that regulators appear to have focussed on this spring after Xi Jinping’s comments were:

  • fast-increasing expense on families, which would restrict the incentive to have more kids and also create a significant separation between the chances for kids with well-to-do parents and kids without. The criticism in the 21 May 19th Meeting of Central Comprehensive Deepening Reform Commission, which released a flurry of Opinions* was that children faced a lower burden in school and a greater burden out of school.

*”Guiding Opinions on Improving the Evaluation Mechanism of Scientific and Technological Achievements”, “Opinions on Further Reducing the Burden of Students’ Homework and Off-campus Training in Compulsory Education”, and several others.

  • marketing free-for-all with false or damaging advertising and predatory plan pricing and structuring, including pre-charging for classes which would not be used. 
  • A lack of regulation/strict oversight of teacher/tutor licensing, ensuring proper resource allocation to teachers themselves, 
  • and a get-rich-quick mindset from what Xi Jinping thinks should be a solemn duty to educate the youth of the country. 

As Xinhua put it in reporting about that May 21 meeting…


The meeting emphasized that it is necessary to fully regulate the management of off-campus training institutions, adhere to strict governance, and severely investigate and deal with institutions that have problems such as non-qualification, chaotic management, taking advantage of money, false propaganda, and collusion with schools for profit. It is necessary to clarify the charging standards of training institutions, strengthen the supervision of pre-charging, and strictly prohibit arbitrary capitalization operations, and do not allow conscientious industries to become profit-seeking industries. It is necessary to improve relevant laws and manage off-campus training institutions in accordance with the law. Party committees and governments at all levels must strengthen their main responsibilities, implement the plan in detail, organize scientifically, seek practical results, standardize the order of teaching and training in accordance with the law, strengthen the protection of rights and interests, and ensure the steady implementation of reforms.

In April, the Beijing Administration for Market Regulation fined New Oriental Online RMB 500,000 for pricing violations, and false advertising. Koolearn (1797 HK), TAL Education (TAL US), were also hit.  Shifara Samsudeen, ACMA, CGMA wrote about this in GSX TechEdu: China Fines Online Tutoring Apps for Making Misleading Claims; Is GSX Next? in early May.

In late May, China decided kindergartens and private tutoring schools could no longer teach the elementary school curriculum, starting June 1, as part of a revision of the Minority Protection Law. Gaotu Techedu (GOTU US) immediately announced it was shutting down its Xiao Zao Qi Meng pre-school education business (3-8yrs). On June 1, the government fined another 15 operators a total of RMB 36.5mm for similar violations to New Oriental Online, including pre-IPO unicorns Zuoyebang and Yuanfudao, with both getting hit for RMB 2.5mm which is the maximum legal amount. New Oriental got hit again. TAL, Onesmart Education (ONE US), China BestStudy (3978 HK) and Bright Scholar Education (BEDU US) were also hit for the same reasons by SAMR. And then another 10 were hit by local regulators in Guangdong and Shanghai. It was a coordinated attack on Children’s Day.

In the first week of June, Xi Jinping made a much-touted visit to Qinghai in the southwest and it appears both he and the media talked quite a bit about lifting up the lower income areas and people, as per the 14th Five Year Plan, and also noted the problem of after school tutoring burdening students more and school burdening students less, calling it “putting the cart before the horse.”

The Ministry of Education set up a new department (the Off-Campus Education and Training Department) on 15 June to regulate the off-campus tutoring schools to “reduce students’ academic burden”, etc. It will oversee teachers and curricula. Smartkarma provider Zhen Zhou, Toh wrote about the prospects for companies going forward in late June in China Online Education – Diversified Revenue Stream Wins Here – Balance in All Things

Three weeks ago, the Beijing Municipal Education Commission and at least a half dozen other major cities across the country set up summer after-school programs for elementary school students, effectively taking the business which would normally be taken by private sector schools.

The writing has been on the wall since March. And the authorities have been writing over it in heavier and heavier marker for weeks and months.

The largest businesses out there have been under the cosh, racing against time and competitors with somewhat dodgy numbers and promises. They lose money, and now it looks like they won’t be able to raise more. 

A number of Smartkarma insight providers have published insights which have discussed the opportunities and the red flags in the sector. This includes short reports, pre-IPO reports, updates on legal and regulatory changes, and a huge report on the private education sector by Osbert Tang, CFA a few months ago, called China Private Education: This Is Where the Future Lies which has an enormous amount of detail about the sector.

Issues With the Business

The major issues for regulators appear to be…

  • criticisms of false advertising, where the benefits to such education are promised but not proven, where there are spurious claims using fake claims. 
  • criticisms of the structure of the offerings. A number of courses are offered at RMB 1 for the whole course, but then they come back to charge you for extras later. 
  • the “burden” placed on children
  • an air of get rich quick to the entire industry which is seen to be against the national interest.

For investors, many of the major issues have to do with how companies which promise growth are actually “growing.”

Gaotu, formerly called GSX Techedu, had claimed to be the leading provider of online classes from K-12, was IPOed in 2019 at a $3bn valuation, rose to 10x that, then fell. GSX had been the subject of short seller reports in the first half of 2020 accusing the company of inflating student enrolment numbers using bots, fabricating teachers, falsifying reviews, and falsifying revenues. Multiple reports (as per GMT Research’s Hall of Shame on GSX, Grizzly Research, Muddy Waters, JLWarren who wrote 30 May on Smartkarma in GSX: Minimal Market Share; ~80% Fake Enrollment and Operational Irregularities, GMT itself, and others (links at the bottom of that link) found different former teachers or others who talked about faked reviews, faked parents, faked students, bots/brushing, related party transactions to create expenses, or remove them (depending on the short seller report), boosted to remove the cash that should have been there from the fake revenue, possible fake capital raise, etc. The laundry list of accusations is long, sordid, and painfully similar to situations which have later been determined to be fraud. 

Against the pattern of companies calling out short seller research firms’ reports, GSX was often curiously quiet, and the stock rose anyway, tripling after Muddy Waters released their report from $40/share to $120/share before falling back.

The shares then rallied very sharply in January as part of a short squeeze on “meme stonks” and heavily-shorted names. Archegos apparently owned more than 10% through a variety of PB accounts. Archegos fell. GSX fell with it. And since then it has lost another two thirds of its value to get back to under US$10/share. 

Pre-market, it is apparently indicated at US$3.65/share. Down 62%. 

A Side Problem

Evelyn Zhang recently wrote about the change in attitude towards “white collar education” in A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education. It is a good read. 

Her advice on 3 July was to short all Chinese online education stocks which had a K-12 offering, and go long all companies which provided vocational training.

After today, that will have been a beauty of a trade. 

Medium-term, the problem authorities will find is that parents don’t necessarily want their kids to not have access to the after-school cram services. They don’t have time to teach them themselves, and because the cutoff to continue later education is harsh and many parents don’t want their kids to go to vocational school to enter the blue collar workforce, lots of parents are actually objecting to the crackdown. They are happy to pay if it gives their kids a better chance. 

The high cost of education is one reason to not have a second (or third) child. The high cost of real estate is another. But education is status and a chance at wealth and intellectual happiness. It has been the case for hundreds of years in China. It is not clear that if the public sector takes on the education and after-school education “burden” from the private sector that it will please the wider public. It is not clear an increased number of qualified teachers will want to get paid public education system wages either. 

The Problem For Investors

Now the chickens are coming home to roost. 

Xi Jinping declared after-school education to be a “social problem” in front of the Two Sessions. Some people did not take him seriously at the time, but regulators have been taking his words seriously and have started cracking down. Legislators have made new legislation. And the Ministry of Education has a new department. 

Now it appears China wants foreign capital out of the business, and it wants those operators (already listed, or unicorns sponsored by China megatech) which have raised capital to not use it grow market share. 

It wants the entire business to support the national interest. Without profit. 

Larry Chen (founder and chairman of Gaotu), once a teacher in an impoverished little village, later become multi-billionaire, may not be able to keep his billions. And I expect this does not bother Xi Jinping.

A basket of names in HK, mainland China, and NYSE (using pre-market prices as of one minute before the open for today’s price) is shown below. It is a heavy hit.

By my count using pre-open prices and the ugly HK closes, that is $18bn in one shot on those 16 names.

More below the fold.

SKT MSCI Downweight Is a Golden Trading Opportunity: Entry/Closing Points Discussion

By Sanghyun Park

Currently, the hottest trading issue in the Korean local market is SK Telecom’s MSCI downweight play. At the current foreign room (5.29%), a 75% weight-down is pretty much guaranteed.

Passive impact

We are currently receiving a full 1.0 FIF (foreign inclusion factor) adjustment coefficient. So, if downgraded to 0.25, it will lead to a 75% outflow of funds.

Post review adjustment factorForeign room (1-FOL burnout)
Current adjustment factor≥ 25%15~25%7.5~15%3.75~7.5%< 3.75%
Source: MSCI

Here is an estimation of a passive impact on SKT. Assuming that the size of passive funds following MSCI Standard Korea is ₩80T, approximately ₩830B of passive funds are estimated to have flowed into SKT. Since this is a 75% decrease, ₩622B is expected to be sold. At the last close, this is slightly over 2 million shares, and it will have a fairly large impact, about 10 times ADTV.

Passive impact
30-day average daily trading volume204,385
– Value₩65.5B
Total estimated passive funds mirroring MSCI Korea₩80,000.0B
Estimated passive outflow₩622.2B
Estimated passive outflow/ADTV9.49x
Source: KRX & MSCI

FTSE EPRA NAREIT Asia ADD Basket – More To Go

By Travis Lundy

FTSE EPRA Nareit launched a change in Ground Rules on 24 June. As discussed in FTSE EPRA NAREIT Ground Rule Changes – Impact on J-REITs/Developed Asia Lessors, the big change was a lowering of the hurdle rate for entry within the Asia Pacific sub-index to the global level for DM markets, and that meant a number of REITs and property companies in Asia which had been just too small to get in will now more likely get into the index in September. 

The announcement is due 1 September. The inclusion date is 17 September.

This caught investors by surprise, and baskets were hurriedly formed. The Quiddity basket is a total of 38 we-think-likely candidates (there are some slight oddities in the calcs).

We are now exactly four weeks in. There are five weeks left. The 38-name Basket has out-performed the FTSE EPRA Nareit AsiaPac index by 6.5% since the close of 24 June and 2.7% since I wrote about it 1 July. 

An update on the progression, the dispersion, and the excess volume traded to-date is below.

Before it’s here, it’s on Smartkarma