Overseas Chinese Equities, Aequitas Research

Ming Lu

Overseas Chinese Equities

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 Bottom-Up

<ul class="">
<li>The new rule for tutoring school damaged the prices of Chinese education equities.</li>
<li>The market focuses on the “non-profit” requirement, but we believe “Article 13” is more important.</li>
<li>We believe the authorities try to block all the ways that a tutoring school can continue.</li>
<li>We do not believe this is a “low-price opportunity” after the stock price plunge.</li>
<li>Please also see <a href="https://www.smartkarma.com/insights/tal-education-tal-last-summer-for-physical-tutoring-school" target="_blank" data-smartkarma-citation="insights:53714" rel="noopener">TAL Education (TAL): Last Summer for Physical Tutoring School</a> on June 28 before the price plunge.</li>
</ul>


The new rule for tutoring school damaged the prices of Chinese education equities.
The market focuses on the “non-profit” requirement, but we believe “Article 13” is more important.
We believe the authorities try to block all the ways that a tutoring school can continue.
We do not believe this is a “low-price opportunity” after the stock price plunge.
Please also see TAL Education (TAL): Last Summer for Physical Tutoring School on June 28 before the price plunge.


TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”

Equity Analyst, LightStream Research

Shifara Samsudeen, ACMA, CGMA

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Event-Driven

<p>China’s new rules and regulations in private tutoring have triggered a massive sell-off in the education companies including <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> , <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> . The new rules announced by Beijing include turning after-school tutoring companies (tutoring on school curriculum) into not-for-profit which would prevent online tutoring platforms from raising foreign capital and at the same time seeking public listing. After-school tutoring is in huge demand in China and soaring tuition fees have become a huge burden on parents and the government of China is attempting to reduce the cost of education in order to encourage couples to have more kids as education accounts for a large share of childcare in China.</p><p>Similarly, private tutoring in India is in huge demand as a large majority of K-12 school students in the country attend after-school tutoring. Known as tuition culture, it has been prevalent in India for decades which supplements the school education of children. In this insight, we examine the private tutoring market in India (including online) and the likelihood of similar directives (to that of China) and how it could impact the fundamentals and valuations of online education platforms in the country.</p>

China’s new rules and regulations in private tutoring have triggered a massive sell-off in the education companies including Gaotu Techedu (GOTU US) , New Oriental Education (EDU US) and TAL Education (TAL US) . The new rules announced by Beijing include turning after-school tutoring companies (tutoring on school curriculum) into not-for-profit which would prevent online tutoring platforms from raising foreign capital and at the same time seeking public listing. After-school tutoring is in huge demand in China and soaring tuition fees have become a huge burden on parents and the government of China is attempting to reduce the cost of education in order to encourage couples to have more kids as education accounts for a large share of childcare in China.Similarly, private tutoring in India is in huge demand as a large majority of K-12 school students in the country attend after-school tutoring. Known as tuition culture, it has been prevalent in India for decades which supplements the school education of children. In this insight, we examine the private tutoring market in India (including online) and the likelihood of similar directives (to that of China) and how it could impact the fundamentals and valuations of online education platforms in the country.

As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<div class="content-highlight"><p><strong>Krafton held an online press conference today.</strong> The key focus of the <a href="http://koreabizwire.com/krafton-eyes-aggressive-mas-after-ipo/195358" target="_blank" rel="noopener">online press conference</a> was that Krafton will be aggressive in overseas M&amp;As. The company could receive nearly 2.5 trillion won in cash from the IPO proceeds. Plus, the company had net cash of 390 billion won at the end of 1Q 2021. Consequently, Krafton could have nearly<strong> 3.0 trillion won</strong> in net cash post the IPO which the company can use to make big overseas acquisitions.</p></div><p><strong>Krafton IPO = PUBG + SPAC? </strong>In some ways, the key thesis of the Krafton IPO is the continued success of PUBG + emphasis on M&amp;As to grow the business in overseas markets. In that respect, Krafton is telling the investors to trust the company to make excellent acquisitions that could add long-term value for the company. This is probably a tough sell for many investors and this remains a major reason on the poor investors' response on the Krafton IPO.</p><p>In addition, Chinese government's huge crackdown on the US listed Internet companies and the for-profit education sector further raise significant concerns that this crackdown could expand to other sectors such as games which would negatively impact Krafton. Overall, continue to maintain an AVOID rating of this IPO. </p>

Krafton held an online press conference today. The key focus of the online press conference was that Krafton will be aggressive in overseas M&amp;As. The company could receive nearly 2.5 trillion won in cash from the IPO proceeds. Plus, the company had net cash of 390 billion won at the end of 1Q 2021. Consequently, Krafton could have nearly 3.0 trillion won in net cash post the IPO which the company can use to make big overseas acquisitions.Krafton IPO = PUBG + SPAC? In some ways, the key thesis of the Krafton IPO is the continued success of PUBG + emphasis on M&amp;As to grow the business in overseas markets. In that respect, Krafton is telling the investors to trust the company to make excellent acquisitions that could add long-term value for the company. This is probably a tough sell for many investors and this remains a major reason on the poor investors' response on the Krafton IPO.In addition, Chinese government's huge crackdown on the US listed Internet companies and the for-profit education sector further raise significant concerns that this crackdown could expand to other sectors such as games which would negatively impact Krafton. Overall, continue to maintain an AVOID rating of this IPO. 

Major Highlights of Krafton's Online Press Conference & Focus on Overseas M&As Post IPO

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

New Oriental Education & Techn / Event-Driven

<p>On Friday 23 July, the 21st Century Business Herald and Bloomberg followed up one <a href="https://www.bloomberg.com/news/articles/2021-07-20/china-aims-to-lower-child-expenses-in-effort-to-boost-birth-rate" target="_blank" rel="noopener">stories</a> which had come out a couple of days earlier (which suggested much more regulation on after-school tutoring businesses), suggesting that China would possibly ban for-profit businesses which tutored China's K-12 students on school curriculum subjects. The same articles Friday suggested no listed businesses would be able to purchase or invest in such businesses, and foreign capital would not be allowed to invest in the businesses.</p>
<p>This was discussed pre-US open in <a href="https://www.smartkarma.com/insights/china-after-school-tutoring-online-education-stocks-crushed-investors-schooled" target="_blank" data-smartkarma-citation="insights:54878" rel="noopener">China After School Tutoring Online Education Stocks Crushed - Investors Schooled</a>. This seemed dramatic, and possibly dire. Stocks in the K-12 education sector in Hong Kong fell dramatically. Stocks listed in the US fell even more. A custom index of 16 names fell nearly 30%. An index of just the three major US-listed names - <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/gaotu-techedu-inc" target="_blank" data-smartkarma-citation="entities:28069:1" rel="noopener">Gaotu Techedu (GOTU US)</a>, and <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> - was down 60% pre-open.</p>
<p>That wasn't enough as the basket closed 6% lower from there. </p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/220/370/original/Screenshot+2021-07-25+at+6.04.13+PM.png?1627207475" class="editor-image img-responsive" data-smartkarma-image-id="220370"></figure>
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<p>It looks like even that may not have been enough.</p>
<h3>The NEW News</h3>
<p>On Saturday, the State Council followed up with a <a href="http://www.gov.cn/zhengce/2021-07/24/content_5627132.htm" target="_blank" rel="noopener">document</a><em>"Opinions on Further Reducing the Workload of Students and The Burden of Out-of-School Training in the Compulsory Education Stage"</em></p>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/220/382/original/Screenshot+2021-07-25+at+9.31.12+PM.png?1627219895" class="editor-image img-responsive" data-smartkarma-image-id="220382"></figure>
</section>
<p>The Opinion is a wide-ranging polemic with instructions to local governments, school systems, educational authorities, etc to deal with the reduction of "double burden" on kids and parents of school system and after-school tutoring system on the same subjects as taught in the school system. There is lots of content suggesting significant detail on things like homework in regular school, who is to be given how much, how much they are not to do, what school administrators in the public school system should do to organise after-school and summer programs. </p>
<p>There are, of course, the sections about the after-school tutoring businesses - strictly enforcing regulations, ensuring proper qualifications, and severely punishing those institutions which fall short, especially those with a profit incentive. </p>
<p>If I were in that business, I would stop making a profit immediately. I would refund payments for currently in-progress classes so that the only payments related to teacher payments and bare minimum support costs are done. I would provide refunds to anyone who would take them so as to immediately cease the business. </p>
<p>Some businesses may be able to pivot. Some may be liquidation candidates. Some will simply be shut down to take the loss. </p>
<p>But this is a big change, and it has been out there. And it looks like when people did not see it quickly enough, it was decided Something Must Be Done. Now it is going to be done.</p>

On Friday 23 July, the 21st Century Business Herald and Bloomberg followed up one stories which had come out a couple of days earlier (which suggested much more regulation on after-school tutoring businesses), suggesting that China would possibly ban for-profit businesses which tutored China's K-12 students on school curriculum subjects. The same articles Friday suggested no listed businesses would be able to purchase or invest in such businesses, and foreign capital would not be allowed to invest in the businesses.
This was discussed pre-US open in China After School Tutoring Online Education Stocks Crushed - Investors Schooled. This seemed dramatic, and possibly dire. Stocks in the K-12 education sector in Hong Kong fell dramatically. Stocks listed in the US fell even more. A custom index of 16 names fell nearly 30%. An index of just the three major US-listed names - TAL Education (TAL US), Gaotu Techedu (GOTU US), and New Oriental Education (EDU US) - was down 60% pre-open.
That wasn't enough as the basket closed 6% lower from there. 






It looks like even that may not have been enough.
The NEW News
On Saturday, the State Council followed up with a document"Opinions on Further Reducing the Workload of Students and The Burden of Out-of-School Training in the Compulsory Education Stage"



The Opinion is a wide-ranging polemic with instructions to local governments, school systems, educational authorities, etc to deal with the reduction of "double burden" on kids and parents of school system and after-school tutoring system on the same subjects as taught in the school system. There is lots of content suggesting significant detail on things like homework in regular school, who is to be given how much, how much they are not to do, what school administrators in the public school system should do to organise after-school and summer programs. 
There are, of course, the sections about the after-school tutoring businesses - strictly enforcing regulations, ensuring proper qualifications, and severely punishing those institutions which fall short, especially those with a profit incentive. 
If I were in that business, I would stop making a profit immediately. I would refund payments for currently in-progress classes so that the only payments related to teacher payments and bare minimum support costs are done. I would provide refunds to anyone who would take them so as to immediately cease the business. 
Some businesses may be able to pivot. Some may be liquidation candidates. Some will simply be shut down to take the loss. 
But this is a big change, and it has been out there. And it looks like when people did not see it quickly enough, it was decided Something Must Be Done. Now it is going to be done.

China's New After-School Tutoring Policy Is Out - The End of the Line For Many?

HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<p>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 <em>Weibo</em>.</p><p>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.</p>

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?

China

New Oriental Education & Technology Group, Inc. offers educational services. The Company offers foreign language training, test preparation courses for admissions and assessment tests in the United States, the PRC and Commonwealth countries, primary and secondary school education, and other services. New Oriental Education & Technology Group also operates software development.

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New Oriental Education & Techn (EDU US)

TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”

The market focuses on the “non-profit” requirement, but we believe “Article 13” is fatal. We believe the authorities try to block all the way that...

Ming Lu

As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?

It seems that India’s edutech sector is poised for more .growth which would possibly make it one of the world’s largest edutech markets

Shifara Samsudeen, ACMA, CGMA

Major Highlights of Krafton's Online Press Conference & Focus on Overseas M&As Post IPO

Krafton held an online press conference today. The key focus of the online press conference was that Krafton will be aggressive in overseas...

Douglas Kim

China's New After-School Tutoring Policy Is Out - The End of the Line For Many?

The State Council has now put out its policy for after-school education and private tutoring of school curriculum. But it is bigger than that. This...

Travis Lundy

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

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