TMT & Consumer Independent Equity Research Analyst, Obex Capital Research

Aaron Gabin

TMT & Consumer Independent Equity Research Analyst

TMT & Consumer Independent Equity Research

Obex Capital Research

“Obex” is Latin for Barriers to Entry. Obex Capital Management’s investment philosophy is driven by an intense focus on which business model’s Barriers to Entry are able to withstand the ever increasing competitive disruption in the TMT and Consumer Sectors.

Equity Bottom-Up

<p><strong>Summary: </strong>Coursera, an online education platform will see its business model decelerate faster than expected. While the TAM trajectory of online education has clearly inflected higher due to the pandemic, we think  the Coursera’s growth trajectory is being mismodeled based on 2020’s surge in signups. Coursera’s profitability is dependent on scaling its enterprise and degree customer bases. While the demand for upskilling employees is real, intense competition from LinkedIn, Pluralsight, and others may crimp growth and gross margins segment, while a lack of leverage with its content suppliers (university partners), plus edX’s open source alternative  weaken revenue sharing over time. A lack of tangible evidence of Coursera’s skills-based credentialing translating to jobs will result in underwhelming consumer growth and lack of pricing power. Downside risks around regulation and competitive incursion by tech platforms paired with an obscene valuation make a compelling short case.</p><p> <strong>Base Case Valuation: $33                                  Bull Case: $57                                 Bear Case: $20</strong></p><p></p><div class="content-highlight"><p>Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</p></div>

Summary: Coursera, an online education platform will see its business model decelerate faster than expected. While the TAM trajectory of online education has clearly inflected higher due to the pandemic, we think  the Coursera’s growth trajectory is being mismodeled based on 2020’s surge in signups. Coursera’s profitability is dependent on scaling its enterprise and degree customer bases. While the demand for upskilling employees is real, intense competition from LinkedIn, Pluralsight, and others may crimp growth and gross margins segment, while a lack of leverage with its content suppliers (university partners), plus edX’s open source alternative  weaken revenue sharing over time. A lack of tangible evidence of Coursera’s skills-based credentialing translating to jobs will result in underwhelming consumer growth and lack of pricing power. Downside risks around regulation and competitive incursion by tech platforms paired with an obscene valuation make a compelling short case. Base Case Valuation: $33                                  Bull Case: $57                                 Bear Case: $20Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

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

APAC IPOs & Placements

Zhen Zhou, Toh

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

Zhihu Technology / Equity Capital Markets

<div><p><a href="https://www.smartkarma.com/entities/zhihu-technology-ltd" target="_blank" data-smartkarma-citation="entities:32185:1" rel="noopener">Zhihu Technology (ZH US)</a> raised US$773m at the bottom-end of the IPO price range (including the US$250m concurrent placement).</p></div><div><p>In this note, we will discuss what is circulating in the market and share our thoughts on how it impacts Zhihu.</p></div><div><p>Our previous coverage of Zhihu:</p></div><div><ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/zhihu-pre-ipo-in-the-early-stages-of-monetization" target="_blank" data-smartkarma-citation="insights:49157" rel="noopener">Zhihu (知乎) Pre-IPO - In the Early Stages of Monetization</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/zhihu-censorship-as-top-risk-may-follow-fate-of-weibo" target="_blank" data-smartkarma-citation="insights:49184" rel="noopener">Zhihu (知乎): Censorship as Top Risk, May Follow Fate of Weibo</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/zhihu-ipo-monetizing-curiosity" target="_blank" data-smartkarma-citation="insights:49467" rel="noopener">Zhihu (知乎) IPO - Monetizing Curiosity</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/zhihu-ipo-trading-peers-have-corrected-significantly-but-still-has-a-modest-upside" target="_blank" data-smartkarma-citation="insights:49684" rel="noopener">Zhihu (知乎) IPO Trading - Peers Have Corrected Significantly but Still Has a Modest Upside</a> </li>
</ul></div>

Zhihu Technology (ZH US) raised US$773m at the bottom-end of the IPO price range (including the US$250m concurrent placement).In this note, we will discuss what is circulating in the market and share our thoughts on how it impacts Zhihu.Our previous coverage of Zhihu:

Zhihu (知乎) Pre-IPO - In the Early Stages of Monetization 

Zhihu (知乎): Censorship as Top Risk, May Follow Fate of Weibo 

Zhihu (知乎) IPO - Monetizing Curiosity 

Zhihu (知乎) IPO Trading - Peers Have Corrected Significantly but Still Has a Modest Upside 


Zhihu (知乎) IPO Trading Update - Peers Took Another Leg Down on the Back of Rumored Document

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.

<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

Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

Alibaba Group Holding  / Equity Bottom-Up

<ul class="">
<li>The chief of the People’s Bank of China made a positive comment on Ant Group.</li>
<li>India will ban 59 Chinese apps forever.</li>
<li>Tencent Music (TME US) increased its shareholdings in Universal Music Group.</li>
<li>Xiaomi (1810 HK)'s smartphone shipment increased by 32% yoy in 4Q20. </li>
</ul>


The chief of the People’s Bank of China made a positive comment on Ant Group.
India will ban 59 Chinese apps forever.
Tencent Music (TME US) increased its shareholdings in Universal Music Group.
Xiaomi (1810 HK)'s smartphone shipment increased by 32% yoy in 4Q20. 


China Internet Weekly (1Feb2021): Central Bank's Positive Comment on Ant, Xiaomi Got Mkt Share in Q4

China

East Buy Holding Limited operates livestreaming platform businesses. The Company provides private label products including agricultural products, food, books, and household goods. East Buy Holding also conducts college education businesses.

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East Buy Holding (1797 HK)

Coursera: Back to School

Coursera, an online education platform will see its business model decelerate faster than expected. Downside risks around regulation and...

Aaron Gabin

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

Zhihu (知乎) IPO Trading Update - Peers Took Another Leg Down on the Back of Rumored Document

We think the drop is overdone. Sure, Zhihu is sort of an educational website but it is nowhere close to what the techedu companies are doing.

Zhen Zhou, Toh

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

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Coursera: Back to School

Coursera, an online education platform will see its business model decelerate faster than expected. Downside risks around regulation and...

Aaron Gabin

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

Zhihu (知乎) IPO Trading Update - Peers Took Another Leg Down on the Back of Rumored Document

We think the drop is overdone. Sure, Zhihu is sort of an educational website but it is nowhere close to what the techedu companies are doing.

Zhen Zhou, Toh

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

China Internet Weekly (1Feb2021): Central Bank's Positive Comment on Ant, Xiaomi Got Mkt Share in Q4

The chief of Chinese central bank positively commented Ant Group.India will ban 59 Chinese apps forever. Tencent Music increased its shareholdings...

Ming Lu