HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

Share price of the China Education Sector stocks, particularly the US listed online education ones, are hit hardest on Friday amid the rumoured release of extremely stringent government regulatory changes. The CCPC and State Council official announcement was made on Saturday, and basically removed the survival of online and curriculum-related after-school tutoring classes for Pre-K and compulsory education grades. <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> and <a href="https://www.smartkarma.com/entities/gaotu-techedu-inc" target="_blank" data-smartkarma-citation="entities:28069:1" rel="noopener">Gaotu Techedu (GOTU US)</a> all pledged to support the decisions on Saturday night via Weibo.We believe the best way to position in the sector is to focus on higher and vocational education sub-segments. In this regard, <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> is best positioned given its pure exposure in this market and nil exposure to K-12 schools (online/offline). The 26.3% drop in share price from the peak provides an attractive entry point, in our view. Among the three online education companies, <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> looks comparatively safer due to its buffer from other businesses, but we would warn against the extreme risks associated with bottom-fishing this name.

Share price of the China Education Sector stocks, particularly the US listed online education ones, are hit hardest on Friday amid the rumoured release of extremely stringent government regulatory changes. The CCPC and State Council official announcement was made on Saturday, and basically removed the survival of online and curriculum-related after-school tutoring classes for Pre-K and compulsory education grades. New Oriental Education (EDU US), TAL Education (TAL US) and Gaotu Techedu (GOTU US) all pledged to support the decisions on Saturday night via Weibo.We believe the best way to position in the sector is to focus on higher and vocational education sub-segments. In this regard, China Education Group (839 HK) is best positioned given its pure exposure in this market and nil exposure to K-12 schools (online/offline). The 26.3% drop in share price from the peak provides an attractive entry point, in our view. Among the three online education companies, New Oriental Education (EDU US) looks comparatively safer due to its buffer from other businesses, but we would warn against the extreme risks associated with bottom-fishing this name.

China Private Education: How to Position After the Regulatory Crackdown?

Research on Tech Companies

Evelyn Zhang

A series of recent Chinese policies promoting vocational schools instead of traditional secondary education, and efforts to eliminate after-class cramming makes me to recommend short K12 education related stocks and long vocational training related stocks.

A series of recent Chinese policies promoting vocational schools instead of traditional secondary education, and efforts to eliminate after-class cramming makes me to recommend short K12 education related stocks and long vocational training related stocks.

A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education

Equity Bottom-Up

<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> (CEG) reported an impressive 50.2% YoY growth in its adjusted net profit for 1H21, driven by the combination of good organic momentum and contribution from new schools added. By segment, higher education and global education are the key underpinning factors, as vocational education enrollment has disrupted more by COVID-19.In the post-1H21 result call, management revealed that 6 M&amp;A projects are now in advance discussion and expects many of them can be concluded in this year. This will add to the organic growth backed by higher enrollment, increase in tuition and efficiency enhancement. We take the guidance of a 32-41% of adjusted net profit growth for FY21 positively, and so is the market as the share price was up 7% so far today. Its valuation multiples are highly justified by the earnings growth prospects, execution capability and quality management, in our view.

China Education Group (839 HK) (CEG) reported an impressive 50.2% YoY growth in its adjusted net profit for 1H21, driven by the combination of good organic momentum and contribution from new schools added. By segment, higher education and global education are the key underpinning factors, as vocational education enrollment has disrupted more by COVID-19.In the post-1H21 result call, management revealed that 6 M&amp;A projects are now in advance discussion and expects many of them can be concluded in this year. This will add to the organic growth backed by higher enrollment, increase in tuition and efficiency enhancement. We take the guidance of a 32-41% of adjusted net profit growth for FY21 positively, and so is the market as the share price was up 7% so far today. Its valuation multiples are highly justified by the earnings growth prospects, execution capability and quality management, in our view.

China Education Group (839 HK): Encouraging Takeaways from 1H21 Result Call

<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> posted a 39.7% YoY growth in adjusted net profit as its higher education segment turned into a key earnings engine. Decent 4pp margin expansion was achieved from higher enrollment, hike in tuition and excellent cost control. We also saw an impressive 127.8% YoY increase in operating cash flow.Management points to further margin expansion for most of its universities, and this will drive contribution to net profit (91% of 1H21 profit from higher education). While M&amp;A activities have slowed, organic growth is expected to stay at least at 25% for the near term. Given its sufficient capacity, there is no need for fund raising from the market. In our view, its 16.3x PER and 4.8x P/B (FY21F ROE: 32%) are highly justified, and Yuhua Education remains one of our top picks as stated in <a href="https://www.smartkarma.com/insights/china-private-education-this-is-where-the-future-lies" target="_blank" data-smartkarma-citation="insights:48727" rel="noopener">China Private Education: This Is Where the Future Lies</a>.

China Yuhua Education (6169 HK) posted a 39.7% YoY growth in adjusted net profit as its higher education segment turned into a key earnings engine. Decent 4pp margin expansion was achieved from higher enrollment, hike in tuition and excellent cost control. We also saw an impressive 127.8% YoY increase in operating cash flow.Management points to further margin expansion for most of its universities, and this will drive contribution to net profit (91% of 1H21 profit from higher education). While M&amp;A activities have slowed, organic growth is expected to stay at least at 25% for the near term. Given its sufficient capacity, there is no need for fund raising from the market. In our view, its 16.3x PER and 4.8x P/B (FY21F ROE: 32%) are highly justified, and Yuhua Education remains one of our top picks as stated in China Private Education: This Is Where the Future Lies. 

China Yuhua Education (6169 HK): Decent 1H21, Key Takeaways from Post-Result Call

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 <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.<h2>What's Original?</h2>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.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.

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

China

China Education Group Holdings Limited offers educational services. The Company provides private universities operating services, education training services, and other services. China Education Group Holdings offers services in Hong Kong.

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China Education Group (839 HK)

China Private Education: How to Position After the Regulatory Crackdown?

Focus on higher and vocational education sub-segments is the best position amid regulatory crackdown. For online players, New Oriental looks more...

Osbert Tang, CFA

A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education

Change is afoot in one of China's main social mobility mechanism, the education system. The country is promoting vocational education in an effort...

Evelyn Zhang