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.

Equity Bottom-Up

<p>We see posts by <a href="https://www.smartkarma.com/entities/gsx-techedu-inc" target="_blank" data-smartkarma-citation="entities:28069:1" rel="noopener">GSX Techedu (GSX US)</a>  employees on Maimai mentioning that certain “celebrity instructors” in K11 and K12 may be leaving the platform after the spring semester as the tutors were instructed to cease recruiting new enrollments for the instructors.   We believe that “celebrity teachers” receive options with a lockup period when signing up with GSX.  The recent stock selloff could result in a significant number of departures of “celebrity instructors”.  GSX consistently claims that “celebrity teachers” are their moat, resulting in their reported unusually high profit margins that the entire K12 AST industry have hard time to comprehend.</p>

We see posts by GSX Techedu (GSX US)  employees on Maimai mentioning that certain “celebrity instructors” in K11 and K12 may be leaving the platform after the spring semester as the tutors were instructed to cease recruiting new enrollments for the instructors.   We believe that “celebrity teachers” receive options with a lockup period when signing up with GSX.  The recent stock selloff could result in a significant number of departures of “celebrity instructors”.  GSX consistently claims that “celebrity teachers” are their moat, resulting in their reported unusually high profit margins that the entire K12 AST industry have hard time to comprehend.

GSX Post Archegos' Liquidation, Chinese K12 Parents Survey - Q2 2021

HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<p>The China Private Education Sector presents an exciting growth story, riding on the increase in spending on education, rise in demand for quality education, support from local governments for private investments and increase in acceptance towards online delivery mode, among others. These positive factors, however, are balanced by the decrease in birth rates and the tight regulatory regime. Despite so, we continue to see good prospects given that earnings growth will remain ahead of the overall market by significant magnitude. Meanwhile, valuations have already returned to more reasonable levels, with investment value started to emerge on some names.</p><p>Companies in the sector have different focuses, including K-12 education, higher education, vocational education, tutoring (online) and tutoring (online and offline), and we have to be very selective. We prefer companies that focus on higher education which face lower regulatory risks, have a clear defined expansion strategy and specialise in a niche market segment. Out of the ten companies covered in this Smartkarma Original, we put forward <a href="https://www.smartkarma.com/entities/china-education-group-holdin" target="_blank" data-smartkarma-citation="entities:18218:1" rel="noopener">China Education Group (839 HK)</a>, <a href="https://www.smartkarma.com/entities/tianli-education-internation" target="_blank" data-smartkarma-citation="entities:27210:1" rel="noopener">Tianli Education (1773 HK)</a> and <a href="https://www.smartkarma.com/entities/china-yuhua-education" target="_blank" data-smartkarma-citation="entities:23627:1" rel="noopener">China Yuhua Education (6169 HK)</a> as our top picks.</p><h2>What's Original?</h2><p>This Smartkarma Original takes an in-depth analysis on 10 companies in the Private Education Sector in China, covering stocks listed in the HKEx, NYSE, Shenzhen Stock Exchange as well as dual listings. In the A-share space, we cover <a href="https://www.smartkarma.com/entities/wuhu-yaxia-automobile-corp" target="_blank" data-smartkarma-citation="entities:9979:1" rel="noopener">Offcn Education Technology (002607 CH)</a>, which is sizeable (market cap of almost HK$210bn) and with unique exposure to the civil servants recruitment examination training.</p><p>Besides addressing the key evolving trends of the industry and the all-important regulatory issues, we also touched on the private funding aspects for some prominent unlisted companies and the IPO trends of the industry. Where appropriate, we share some of our on-ground experiences with the aim to provide a closer feel on the industry and companies. We hope this Smartkarma Original will be a comprehensive and updated reference for China's Private Education Sector.</p>

The China Private Education Sector presents an exciting growth story, riding on the increase in spending on education, rise in demand for quality education, support from local governments for private investments and increase in acceptance towards online delivery mode, among others. These positive factors, however, are balanced by the decrease in birth rates and the tight regulatory regime. Despite so, we continue to see good prospects given that earnings growth will remain ahead of the overall market by significant magnitude. Meanwhile, valuations have already returned to more reasonable levels, with investment value started to emerge on some names.Companies in the sector have different focuses, including K-12 education, higher education, vocational education, tutoring (online) and tutoring (online and offline), and we have to be very selective. We prefer companies that focus on higher education which face lower regulatory risks, have a clear defined expansion strategy and specialise in a niche market segment. Out of the ten companies covered in this Smartkarma Original, we put forward China Education Group (839 HK), Tianli Education (1773 HK) and China Yuhua Education (6169 HK) as our top picks.What's Original?This Smartkarma Original takes an in-depth analysis on 10 companies in the Private Education Sector in China, covering stocks listed in the HKEx, NYSE, Shenzhen Stock Exchange as well as dual listings. In the A-share space, we cover Offcn Education Technology (002607 CH), which is sizeable (market cap of almost HK$210bn) and with unique exposure to the civil servants recruitment examination training.Besides addressing the key evolving trends of the industry and the all-important regulatory issues, we also touched on the private funding aspects for some prominent unlisted companies and the IPO trends of the industry. Where appropriate, we share some of our on-ground experiences with the aim to provide a closer feel on the industry and companies. We hope this Smartkarma Original will be a comprehensive and updated reference for China's Private Education Sector.

China Private Education: This Is Where the Future Lies

<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

Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

<p>This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. </p><p><strong><em>Companies mentioned this week:</em></strong></p><p><a href="https://www.smartkarma.com/entities/sk-hynix-inc" target="_blank" data-smartkarma-citation="entities:16955:1" rel="noopener">SK Hynix (000660 KS)</a>, <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>, <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>, <a href="https://www.smartkarma.com/entities/netease" target="_blank" data-smartkarma-citation="entities:29030:1" rel="noopener">NetEase (9999 HK)</a>, <a href="https://www.smartkarma.com/entities/bilibili-inc" target="_blank" data-smartkarma-citation="entities:26793:1" rel="noopener">Bilibili Inc (BILI US)</a>, <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a></p>

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity indices. Companies mentioned this week:SK Hynix (000660 KS), New Oriental Education (EDU US), TAL Education (TAL US), NetEase (9999 HK), Bilibili Inc (BILI US), Tencent Holdings (700 HK), Baidu (BIDU US)

Global Emerging Markets Weekly: 12 March 2021

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Alibaba Group Holding  / Equity Capital Markets

<div>
<p>2020 saw nine companies undertake a secondary listing in Hong Kong, including the likes of, <a href="https://www.smartkarma.com/entities/jd-com-inc-adr" target="_blank" data-smartkarma-citation="entities:446:1" rel="noopener">JD.com Inc (ADR) (JD US)</a>, <a href="https://www.smartkarma.com/entities/netease-inc-adr" target="_blank" data-smartkarma-citation="entities:17203:1" rel="noopener">NetEase Inc (NTES US)</a> and <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc" target="_blank" data-smartkarma-citation="entities:23677:1" rel="noopener">Yum China Holdings, Inc (YUMC US)</a>, to together raise over US$16bn.</p>
<p>Things have only been getting more uncomfortable for China listings in the US, with the passage of the Holding Foreign Companies Accountable Act through Congress and being signed by Trump. At the same time, Hong Kong has taken further steps to welcome more companies back home. </p>
<p>In our previous notes:</p>
</div><div><ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-deep-dive-yin-and-yang" target="_blank" rel="noopener">China ADRs Secondary Listing Deep-Dive: Yin and Yang,</a> published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. </li>
<li>
<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-covid-19-has-increased-the-tension-but-narrowed-the-short-list" target="_blank" rel="noopener">In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List</a> published in May 2020, we looked at the recent developments and provided an revised short-list</li>
<li>In <a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-holding-foreign-companies-accountable-act-i-m-coming-home" target="_blank" rel="noopener">China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home</a>, published in May 2020, we spoke about the implication of the act which had made its way through the senate.</li>
</ul></div><div><p>In this note, I'll talk about the updates over the past few months and look at the pipeline of deals for the next few months.<a href="https://www.smartkarma.com/insights/china-adrs-secondary-listing-holding-foreign-companies-accountable-act-i-m-coming-home" target="_blank" rel="noopener"></a></p></div>


2020 saw nine companies undertake a secondary listing in Hong Kong, including the likes of, JD.com Inc (ADR) (JD US), NetEase Inc (NTES US) and Yum China Holdings, Inc (YUMC US), to together raise over US$16bn.
Things have only been getting more uncomfortable for China listings in the US, with the passage of the Holding Foreign Companies Accountable Act through Congress and being signed by Trump. At the same time, Hong Kong has taken further steps to welcome more companies back home. 
In our previous notes:


China ADRs Secondary Listing Deep-Dive: Yin and Yang, published in Feb 2020,  we looked at the background and rules around undertaking a secondary listing in Hong Kong and then came up with a short-list of companies that might undertake a secondary listing. 

In China ADRs Secondary Listing: COVID-19 Has Increased the Tension but Narrowed the Short List published in May 2020, we looked at the recent developments and provided an revised short-list
In China ADRs Secondary Listing - Holding Foreign Companies Accountable Act - I’m Coming Home, published in May 2020, we spoke about the implication of the act which had made its way through the senate.
In this note, I'll talk about the updates over the past few months and look at the pipeline of deals for the next few months.

China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move

China

TAL Education Group provides educational services. The Company offers comprehensive tutoring services to students covering core academic subjects such as mathematics, English, Chinese, physics, chemistry, political science, history, and biology. TAL Education Group serves students in China.

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TAL Education (TAL US)

GSX Post Archegos' Liquidation, Chinese K12 Parents Survey - Q2 2021

Apart from negative trends in new enrollments and losses of celebrity teachers, SEC investigation of Archegos could reveal other promotors (Teng...

JL Warren Capital

China Private Education: This Is Where the Future Lies

Profit growth at China Private Education Sector will speed ahead and outperform overall market significantly. With valuations retreated to more...

Osbert Tang, CFA

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

Global Emerging Markets Weekly: 12 March 2021

This insight provides a summary of the key news developments impacting the largest countries and constituents of the Global Emerging Markets equity...

Wium Malan, CFA

China ADRs Secondary Listing - Pipeline Looks Rich, Have Three Years to Move

2020 saw nine companies undertake a secondary listing in Hong Kong, to together raise over US$16bn. We shortlist remaining candidates and look at...

Sumeet Singh

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