HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

We highlight that <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>, given its focus on vocational training, is an off-target victim of the government's regulations on the Private Education Sector and the "Double Reduction" policies. We think it will ride on government's latest supportive measures on vocational training; and with its schools providing training in culinary arts, IT &amp; Internet Technology and auto services, China East will benefit from the shortage of skills workers in China. Also, unlike K-12 education, private participation in vocational education is very encouraged by the government. China East's good post-COVID recovery can be demonstrated by the sharp rebound in student number and stable tuition fees in 1H21. With 90% of students enrolling in long-term program, it has good revenue visibility. We like its sound financial position - Rmb3.5bn net cash, and consideration of shareholder value - bought back nearly 14m shares in Jul and Aug. While valuations are high in absolute terms, China East is clearly another interesting name in the sector after our preferred play <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>.

We highlight that China East Education (667 HK), given its focus on vocational training, is an off-target victim of the government's regulations on the Private Education Sector and the "Double Reduction" policies. We think it will ride on government's latest supportive measures on vocational training; and with its schools providing training in culinary arts, IT &amp; Internet Technology and auto services, China East will benefit from the shortage of skills workers in China. Also, unlike K-12 education, private participation in vocational education is very encouraged by the government. China East's good post-COVID recovery can be demonstrated by the sharp rebound in student number and stable tuition fees in 1H21. With 90% of students enrolling in long-term program, it has good revenue visibility. We like its sound financial position - Rmb3.5bn net cash, and consideration of shareholder value - bought back nearly 14m shares in Jul and Aug. While valuations are high in absolute terms, China East is clearly another interesting name in the sector after our preferred play China Education Group (839 HK).

China East Education (667 HK): Riding on Government's Push for Vocational Schools

Thematic (Sector/Industry)

In Sep, various ministries and local governments have announced detailed regulations or opinion-seeking drafts for the implementation of central government's "Double Reduction" Opinions. The areas that covered by these regulations range from the qualifications of tutors to the advance collection of tuition fees. While this should be anticipated, we think there is risk of regulatory overshoot which will put further pressure on the after-school tutoring companies like <a href="https://www.smartkarma.com/entities/new-oriental-education-technology-group" target="_blank" data-smartkarma-citation="entities:32210:1" rel="noopener">New Oriental Education &amp; Technology Group (9901 HK)</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>.We can see that the regulations are all targeted on off-campus after-school tutoring but not on the higher and vocational segment. In this regard, we believe <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>, which focused on higher education, and <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>, which focused on vocational training, are better positioned in this wave of regulatory crackdown.

In Sep, various ministries and local governments have announced detailed regulations or opinion-seeking drafts for the implementation of central government's "Double Reduction" Opinions. The areas that covered by these regulations range from the qualifications of tutors to the advance collection of tuition fees. While this should be anticipated, we think there is risk of regulatory overshoot which will put further pressure on the after-school tutoring companies like New Oriental Education &amp; Technology Group (9901 HK), TAL Education (TAL US) and Gaotu Techedu (GOTU US).We can see that the regulations are all targeted on off-campus after-school tutoring but not on the higher and vocational segment. In this regard, we believe China Education Group (839 HK), which focused on higher education, and China East Education (667 HK), which focused on vocational training, are better positioned in this wave of regulatory crackdown.

China Private Education: More Regulations Rolled Out Backing "Double Reduction"

We take the recent newsflow on business development at <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> positively. While the market may still skeptical towards the company due to the sector's regulatory worries, CEG is standing in a better position than many of its peers given its focus on the vocational and higher education segment. In our view, the beaten-down performance of CEG's share price is not justified, and it is an interesting time to look at its long-term promising outlook now.   The 58% increase in approval higher education enrollment quota for 2021/2022 academic year, upside from contribution of the newly added Chengdu Jincheng College, support from banks and IFC through provisions of seven-year loan facilities at low pricing, rapid execution of M&amp;A and further potential pipeline acquisitions all lend support to CEG's business prospects amid a turbulent time. Our belief is that at 13.5x PER for FY22, CEG is inexpensively priced relative to growth.

We take the recent newsflow on business development at China Education Group (839 HK) positively. While the market may still skeptical towards the company due to the sector's regulatory worries, CEG is standing in a better position than many of its peers given its focus on the vocational and higher education segment. In our view, the beaten-down performance of CEG's share price is not justified, and it is an interesting time to look at its long-term promising outlook now.   The 58% increase in approval higher education enrollment quota for 2021/2022 academic year, upside from contribution of the newly added Chengdu Jincheng College, support from banks and IFC through provisions of seven-year loan facilities at low pricing, rapid execution of M&amp;A and further potential pipeline acquisitions all lend support to CEG's business prospects amid a turbulent time. Our belief is that at 13.5x PER for FY22, CEG is inexpensively priced relative to growth.

China Education (839 HK): More Flows of Positive Development

China and US Equity Analyst

Roger Xie

Cross Asset Strategy

<ul>
<li>China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. <a href="https://www.smartkarma.com/entities/hang-seng-tech-index" target="_blank" data-smartkarma-citation="entities:31367:1" rel="noopener">Hang Seng Tech Index (HSTECH INDEX)</a> has declined 40% from its high in February this year.</li>
<li>In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a> as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. </li>
<li>China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.</li>
</ul>


China’s tech sector has been in the spotlight in recent days. Beijing has released a series of rules aiming to remake private education and tech sectors. to curb cost pressure and better serve ordinary people.  we believe the magnitude of policy change on private education sector is unprecedent, which could surprise investors. This negative sentiments further spurs the fear of  anti-trust and unfair competition scrutiny on China Internet sector. It has led to capital flight from China tech sector. Hang Seng Tech Index (HSTECH INDEX) has declined 40% from its high in February this year.
In the newly released policy, the State Council banned foreign capital from investing in education institutions through any approach, including VIE (Variable Interest Entity) structure. This has led to investor concerns whether the ban on foreign investments through VIE will be extended to other sectors. VIE is considered to be the foundation of offshore China ADR listing structure. Our assessment shows that the VIE structure will remain to stay, but the new oversea listings could face more scrutiny from regulators. The paradigm shift could fundamentally benefit HKEX (388 HK) as the preferred listing venue for offshore China ADR. And the dual-listing status for many China tech giants will remain. 
China central bank lowered bank reserve requirement ratio early this month and free up US$154bn from the system. The benchmark 10-year treasury  yield hovered around 2.9%  past few weeks indicating plenty of liquidity. Investors have been speculating that LPR (Loan Prime Rate) might be cut further to stimulate the growth. We believe structural monetary policy operations will continue. Likely, more support will be provided toward green energy, innovations and industry upgrade, but it might remain tightening for property and overcapacity sectors. The upcoming Politburo Meeting in end of July could give more hints about monetary policy stance. More than 40% of China A-share companies have released their 1H earning preview, which delivered 120% year-over-year growth (due to low base by pandemic in 2020). We remain sanguine on China equity market outlook in 2H 2021, but would recommend more clarity on policy for China tech giants.


China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

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<h2>Headline Developments</h2>Another bad week for Didi (DIDI) , with the stock plummeting a further 21% after Bloomberg reported that Chinese regulators were weighing up “serious, perhaps unprecedented penalties” which may include a hefty fine (&gt;$2.8b), enforcing a state-owned investment or delisting the company from the NYSE.

Headline DevelopmentsAnother bad week for Didi (DIDI) , with the stock plummeting a further 21% after Bloomberg reported that Chinese regulators were weighing up “serious, perhaps unprecedented penalties” which may include a hefty fine (&gt;$2.8b), enforcing a state-owned investment or delisting the company from the NYSE.

China

China Chunlai Education Group Co., Ltd. provides educational services. The Company offers private higher education services and other services. China Chunlai Education Group provides services in China.

China East Education Holdings Limited provides vocational training educational services. The Company offers culinary education, internet technology education, automotive education, and other services. China East Education Holdings provides services in China.

Xiamen Unigroup Xue Co., Ltd. offers various educational services. The Company provides after-school tutoring and education consulting. Unigroup Xue also participates in real estate development and investment activities.

Zhejiang Yasha Decoration Company Ltd. provides decorating services for large-scale infrastructure, high-end luxury hotel and luxury residential property.

Shanghai Xin Nanyang Co., Ltd., through its subsidiaries, manufactures communication products and industrial equipment, develops cable TV network, security trading, and communication systems, provides network integration, education, and precision processing services.

China Kepei Education Group Limited provides educational services. The Company offers high-quality profession-oriented education services and other services. China Kepei Education Group provides services in China.

China YuHua Education operates private education from kindergarten to university in China.

Eastern Pioneer Driving School Co. Ltd. operates as a driving school.  The Company offers training for a variety of vehicles including passenger cars, motorcycles, trucks, and more.

JH Educational Technology Inc. provides education services. The Company offers higher education, secondary education, and other services. JH Educational Technology provides services in China.

Dong Yi Ri Sheng Home Decoration Group Company Limited designs and constructs set decorations, integrates home decoration materials, manufactures wood products and provides organic home decoration solutions, and its franchise business.

Dong Yi Ri Sheng Home Decoratn Gp (002713 CH)

G8 Education Limited provides community-focused child care for families to foster their child's development.  The Company also conducts a range of child care services that includes child care centers acquisition, child care centers management, and industry-related project management, services and consultancy.

Lung Yen Life Service Corp operates a cemetery and offers funeral and disposition services.

AcadeMedia AB provides educational services. The Company offers pre-school, elementary, secondary, vocational, adult education, comprehensive lesson plans, skills training, and professional rehabilitation services. AcadeMedia operates throughout Sweden.

Propel Funeral Partners Limited provides funeral services. The Company owns and operates funeral homes, cemeteries, crematoria, and related assets, as well as offers funeral, cremation, burial, and mortuary services. Propel Funeral Partners serves individuals and families in Australia and New Zealand.

SISB operates a premium K-12 international school in Thailand, adopted Singapore, UK and IBDP curriculum as a blended student pathway in schools. SISB was established in 2001 with the school license under the Private School Act. Currently, there are 6 international schools with over 4,000 students.

Perfect Medical Health Management (previously Perfect Shape Medical Limited) offers slimming and beauty treatments. The Company provides fat softens and dissolves services, laser freckle services, and other services. Perfect Shape Medical offers services in China.

Universal Technical Institute Inc., through its Universal Technical Institute (UTI) campuses, provides technical education training. The Schools, through its UTI campuses, offers automotive, collision repair and refinishing, and diesel training. UTI also offers training in motorcycle, marine, and personal watercraft through its Motorcycle and Marine Mechanics Institutes(MMI).

Universal Technical Institute, Inc (UTI US)

Carriage Services, Inc. operates funeral homes and cemeteries in the United States.  The Company provides a complete range of services relating to funerals, burials, and cremations.  Carriage also sells related products and merchandise such as caskets, burial vaults, garments, and memorials.

Chegg, Inc. provides online educational platform. The Company offers homework help, course selection, note taking, manuals, and textbook rentals services. Chegg serves customers throughout the United States.

The Cross-Harbour (Holdings) Limited, through its subsidiaries, operates a driver training center, tunnel, and electronic tolls. The Company also provides treasury services.

Gaotu Techedu inc develops educational software. The Company offers online K-12 large class after school tutoring as well as foreign language, professional and other courses. Gaotu Techedu serves students in China

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Gaotu Techedu (GOTU US)

China East Education (667 HK): Riding on Government's Push for Vocational Schools

China East should benefit from the government's push on vocational education and its businesses have less regulatory risks. The net cash position...

Osbert Tang, CFA

China Private Education: More Regulations Rolled Out Backing "Double Reduction"

More detailed regulations on after-school tutoring have been rolled out by various ministries and local governments in Sep. The higher education...

Osbert Tang, CFA

China Education (839 HK): More Flows of Positive Development

Good enrollment quota growth, confidence from banking community and IFC and rapid execution of M&As are driving FY22 outlook for CEG, and this...

Osbert Tang, CFA

China Equity Strategy: Tug of War, Policy Uncertainty and Plenty Liquidity

We remain sanguine on China equity market outlook in 2H 2021 given the earning growth and plenty liquidity, but would wait for more clarity on...

Roger Xie

Weekly Innovation Review (WIRE) #42

Headline Developments: Another bad week for Didi (DIDI) , with the stock plummeting a further 21% after Bloomberg reported that Chinese regulators...

Granite Bay Capital

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