HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-east-education-holdings" target="_blank" data-smartkarma-citation="entities:27843:1" rel="noopener">China East Education (667 HK)</a> is interesting as it is probably the only education company with no debt. Net cash amounted to Rmb2.1bn, or 42% of its market capitalisation. </li>
<li>Earnings have bottomed out and the marginal YoY decline in 1H23 is due to upfront costs for staff recruitment. Its vocational education focus also faces fewer regulatory risks.</li>
<li>We consider it a potential privatisation candidate at 0.8x P/B. Its major shareholders owned 75% of the company, leaving a free float of less than HK$1.4bn.</li>
</ul>



China East Education (667 HK) is interesting as it is probably the only education company with no debt. Net cash amounted to Rmb2.1bn, or 42% of its market capitalisation. 
Earnings have bottomed out and the marginal YoY decline in 1H23 is due to upfront costs for staff recruitment. Its vocational education focus also faces fewer regulatory risks.
We consider it a potential privatisation candidate at 0.8x P/B. Its major shareholders owned 75% of the company, leaving a free float of less than HK$1.4bn.


China East Education (667 HK): Getting More Interesting

<ul>
<li>
<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> appears to be facing the headwinds from higher USD interest rate and reduction in capitalised interest. The intangible write-off is another drag on FY23.</li>
<li>Newly registered students increased 17.8% for FY24. With better average fees, this will help the topline. Our concerns are high finance and operating costs will erode revenue growth.</li>
<li>Consensus is overly aggressive and there are risks of downgrade. Earnings may re-accelerate in the future, but weaker 1H FY24F keeps us on the sideline in the short term. </li>
</ul>



China Education Group (839 HK) appears to be facing the headwinds from higher USD interest rate and reduction in capitalised interest. The intangible write-off is another drag on FY23.
Newly registered students increased 17.8% for FY24. With better average fees, this will help the topline. Our concerns are high finance and operating costs will erode revenue growth.
Consensus is overly aggressive and there are risks of downgrade. Earnings may re-accelerate in the future, but weaker 1H FY24F keeps us on the sideline in the short term. 


China Education Group (839 HK): Not so Encouraging in the near Term

<ul>
<li>Despite the rally in share price after trading resumption and a reasonable FY22 result, there are still several tough issues faced by <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>. </li>
<li>Cash management, especially for offshore; no dividend payout in the near term; availability of CB refinancing and weakened margins are just some of the challenges. </li>
<li>Conversion to profit-basis for its schools and the operating outlook for new schools are also added issues that it needs to address. In our view, risks still outweigh return.</li>
</ul>


Despite the rally in share price after trading resumption and a reasonable FY22 result, there are still several tough issues faced by China Yuhua Education (6169 HK). 
Cash management, especially for offshore; no dividend payout in the near term; availability of CB refinancing and weakened margins are just some of the challenges. 
Conversion to profit-basis for its schools and the operating outlook for new schools are also added issues that it needs to address. In our view, risks still outweigh return.


China Yuhua Education (6169 HK): Issues Are Not over Yet

Thematic (Sector/Industry)

<ul>
<li>The sharp rally of China's higher education stocks on 18 Nov reflects positive sentiment from announcement of "Implementation Plan for the Project of Reaching the Standards for Running Vocational Schools".</li>
<li>For <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>, potential resumption of dividend will be a driver. The 48% increase in 2022/23 registered students and 10pp utilisation growth have secured FY23 outlook.  </li>
<li>CEG's premium valuations are justified by execution capability, asset quality and earnings outlook. FY23 consensus forecasts are just too low and upgrades will be positive catalysts.</li>
</ul>


The sharp rally of China's higher education stocks on 18 Nov reflects positive sentiment from announcement of "Implementation Plan for the Project of Reaching the Standards for Running Vocational Schools".
For China Education Group (839 HK), potential resumption of dividend will be a driver. The 48% increase in 2022/23 registered students and 10pp utilisation growth have secured FY23 outlook.  
CEG's premium valuations are justified by execution capability, asset quality and earnings outlook. FY23 consensus forecasts are just too low and upgrades will be positive catalysts.


China Private Education: A Massive Comeback?

Hope Education Group Co Ltd / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/hope-education-group-co-ltd" target="_blank" data-smartkarma-citation="entities:27321:1" rel="noopener">Hope Education Group Co Ltd (1765 HK)</a> achieved good student enrollment quota increase for 2022/2023 academic year and student recruitment results at overseas schools are also very encouraging. </li>
<li>Improvement in teaching quality and better facilities should narrow the gap of fees per student (Rmb11,814) with the national average (Rmb20,000), driving net profit growth in 3-5 years. </li>
<li>Capex will come down over time given good upside in utilisation and the removal of management fees will relieve financial position. Its relative valuation is also inexpensive. </li>
</ul>



Hope Education Group Co Ltd (1765 HK) achieved good student enrollment quota increase for 2022/2023 academic year and student recruitment results at overseas schools are also very encouraging. 
Improvement in teaching quality and better facilities should narrow the gap of fees per student (Rmb11,814) with the national average (Rmb20,000), driving net profit growth in 3-5 years. 
Capex will come down over time given good upside in utilisation and the removal of management fees will relieve financial position. Its relative valuation is also inexpensive. 


Hope Education (1765 HK): More than Just Hopes

China

Edvantage Group Holdings Ltd is a private higher education group. The Company operates private, higher education institutions located in China and Australia. Edvantage Group Holdings operates as a holding company.

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Edvantage Group (382 HK)

China East Education (667 HK): Getting More Interesting

China East Education is debt-free with strong net cash. Earnings have stabilised, and it faces fewer regulatory risks. It is a potential...

Osbert Tang, CFA

China Education Group (839 HK): Not so Encouraging in the near Term

CEG is facing challenges from higher USD interest rates, reduced capitalised interest, and write-offs. Despite a 17.8% increase in new students,...

Osbert Tang, CFA

China Yuhua Education (6169 HK): Issues Are Not over Yet

Despite avoiding default on CBs, Yuhua still faces challenges from cash management, no near-term dividend payout, availability of CB refinancing...

Osbert Tang, CFA

China Private Education: A Massive Comeback?

China's latest announcements on vocational education suggested that private involvement in higher education will continue to be welcomed. We like...

Osbert Tang, CFA

Hope Education (1765 HK): More than Just Hopes

The beaten-down stock has a good enrollment quota growth in China and encouraging overseas student recruitment result. Lower capex and removal of...

Osbert Tang, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

China East Education (667 HK): Getting More Interesting

​China East Education is debt-free with strong net cash. Earnings have stabilised, and it faces fewer regulatory risks. It is a potential...

Osbert Tang, CFA

China Education Group (839 HK): Not so Encouraging in the near Term

​CEG is facing challenges from higher USD interest rates, reduced capitalised interest, and write-offs. Despite a 17.8% increase in new students,...

Osbert Tang, CFA

China Yuhua Education (6169 HK): Issues Are Not over Yet

Despite avoiding default on CBs, Yuhua still faces challenges from cash management, no near-term dividend payout, availability of CB refinancing...

Osbert Tang, CFA

China Private Education: A Massive Comeback?

China's latest announcements on vocational education suggested that private involvement in higher education will continue to be welcomed. We like...

Osbert Tang, CFA

Hope Education (1765 HK): More than Just Hopes

The beaten-down stock has a good enrollment quota growth in China and encouraging overseas student recruitment result. Lower capex and removal of...

Osbert Tang, CFA

China East Education is debt-free with strong net cash. Earnings have stabilised, and it faces fewer regulatory risks. It is a potential...

CEG is facing challenges from higher USD interest rates, reduced capitalised interest, and write-offs. Despite a 17.8% increase in new students,...