Forensic Analyst

Jason Yap, CFA

Forensic Accounting

<p>The “<em>double reduction</em>” crackdown on K9 after school tutoring ("AST") that covers primary and middle school curriculums has inflicted major pain on the USD38 billion industry. With the original aim of easing student pressure inside and outside school, it has led to unintended consequences of tutor layoffs, early lease terminations, and fresh anxiety among parents on how to occupy their children's available after school time.</p>
<p>The regulations also shook the confidence of AST investors and enterprises. Weak hands folded by shutting operations, filing for bankruptcy and/or exiting investments while industry leaders with a stronger cash position frown over the best approach to pivot operations.</p>
<p>For industry leaders like <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>, revenues generated from K9 academic tutoring comprise between 50% to 80% of total revenues. Hence, there is a direct material impact on forward revenue and earnings.  In addition, they will incur one-time costs for, amongst others, staff severance, early lease terminations, and refund liabilities for K9 courses that can no longer be administered.  </p>
<p>In August 2021, Beijing education authorities <a href="https://www.caixinglobal.com/2021-08-16/cover-story-whats-next-for-chinas-after-school-tutoring-industry-101755589.html" target="_blank" rel="noopener">extended</a> an olive branch, highlighting that AST companies may switch to sectors that aren’t affected by the new regulations, such as high school tutoring, vocational education, all-round education and adopting hybrid business models. A similar stance might by adopted nationwide and signals (at least some) policy support for the embattled AST sector.</p>
<p>Using TAL Education as a bellwether for the AST sector, we examine the financial and accounting concerns that arise as a direct result of the new regulations. In addition, we analyse the recent exit of a key Convertible Notes investor, who has essentially capitulated in the face of execution uncertainties of TAL's pivot strategy.  Should other investors follow?</p>

The “double reduction” crackdown on K9 after school tutoring ("AST") that covers primary and middle school curriculums has inflicted major pain on the USD38 billion industry. With the original aim of easing student pressure inside and outside school, it has led to unintended consequences of tutor layoffs, early lease terminations, and fresh anxiety among parents on how to occupy their children's available after school time.
The regulations also shook the confidence of AST investors and enterprises. Weak hands folded by shutting operations, filing for bankruptcy and/or exiting investments while industry leaders with a stronger cash position frown over the best approach to pivot operations.
For industry leaders like New Oriental Education (EDU US) and TAL Education (TAL US), revenues generated from K9 academic tutoring comprise between 50% to 80% of total revenues. Hence, there is a direct material impact on forward revenue and earnings.  In addition, they will incur one-time costs for, amongst others, staff severance, early lease terminations, and refund liabilities for K9 courses that can no longer be administered.  
In August 2021, Beijing education authorities extended an olive branch, highlighting that AST companies may switch to sectors that aren’t affected by the new regulations, such as high school tutoring, vocational education, all-round education and adopting hybrid business models. A similar stance might by adopted nationwide and signals (at least some) policy support for the embattled AST sector.
Using TAL Education as a bellwether for the AST sector, we examine the financial and accounting concerns that arise as a direct result of the new regulations. In addition, we analyse the recent exit of a key Convertible Notes investor, who has essentially capitulated in the face of execution uncertainties of TAL's pivot strategy.  Should other investors follow?

TAL Education - Key Investor Capitulates, Should the Rest Follow?

Chief Economist

Diana Choyleva

Enodo Economics

Enodo Economics is an independent macroeconomic forecasting company that untangles complexity, challenges the consensus, and makes sense of the future. Our focus is on China – one of the most misunderstood economies in the world, but one of the most important to figure out.  Enodo’s chief economist, Diana Choyleva, has been analysing China for almost 20 years, while Enodo’s team boasts a combined 140 years’ experience covering China’s economy, politics and markets. 

Macroeconomics

<h2>China News That Matters</h2><ul>
<li>Wang Yi attacks Washington</li>
<li>Opium of the masses. No, not that one</li>
<li>Will China change its Covid-19 approach?</li>
<li>Not just for Olympians. Beijing demands exercise</li>
<li>Please, please have another kid</li>
</ul><div class="content-remarks"><ul style="list-style-type: none;"><li><div>In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.</div></li></ul></div>

China News That Matters
Wang Yi attacks Washington
Opium of the masses. No, not that one
Will China change its Covid-19 approach?
Not just for Olympians. Beijing demands exercise
Please, please have another kid
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

Sino-US/ Tech/ Covid-19/ Exercise/ Babies

Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Independent, Fundamental Quantitative Research

Propitious Research

Fully independent, fundamental and quantitative equity research, focused on companies in the Telecommunication, Media, Technology, Internet and Healthcare sectors in the Global Emerging Markets. Idea generation focused on Quality stocks, trading below their intrinsic Value, with sound Corporate Governance.

Quantitative Analysis

<p>This insight provides the output, and an overview of our, machine learning-driven, proprietary GEM screening model, which takes a three-pronged approach to find the best medium-term long ideas within the top100 largest stocks in the MSCI GEM Index. </p><p>The model is based on 1) a typical quantitative multifactor screening model, enhanced by two Artificial Intelligence Technology-based approaches using 2) a Deep Neural Network model, and 3) a Recurrent Neural Network model. </p><p>This model, which has been developed and tweaked over the past 24 months (and implemented in its current state for &gt;12 months), has a solid real-world performance track record, which I set out in the detail below. </p><p>Notable new entrants to the top decile this month include bottom-fishing in Chinese education through <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>, Russian internet play <a href="https://www.smartkarma.com/entities/yandex-nv-a" target="_blank" data-smartkarma-citation="entities:414:1" rel="noopener">Yandex (YNDX US)</a>, Brazilian beverages giant <a href="https://www.smartkarma.com/entities/ambev-sa" target="_blank" data-smartkarma-citation="entities:24454:1" rel="noopener">Ambev SA (ABEV3 BZ)</a>, and a rebound call on <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>.</p><table class="table table-striped">
<colgroup>
<col>
<col>
<col>
<col>
<col>
</colgroup>
<tbody>
<tr>
<td style="text-align: center; width: 74.9062px;">rank</td>
<td style="width: 262.578px;">Name</td>
<td style="width: 185.766px;">Sector</td>
<td style="width: 147.797px;">Location</td>
<td style="text-align: center; width: 74.9531px;">prev.</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">1</td>
<td style="width: 262.578px;">
<a href="https://www.smartkarma.com/entities/tata-consultancy-svcs-ltd" target="_blank" data-smartkarma-citation="entities:18708:1" rel="noopener">Tata Consultancy Svcs (TCS IN)</a> </td>
<td style="width: 185.766px;">Information Technology</td>
<td style="width: 147.797px;">India</td>
<td style="text-align: center; width: 74.9531px;">19</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">2</td>
<td style="width: 262.578px;">
<a href="https://www.smartkarma.com/entities/shenzhou-intl-group-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10415:1" rel="noopener">Shenzhou Intl Group Holdings (2313 HK)</a> </td>
<td style="width: 185.766px;">Consumer Discretionary</td>
<td style="width: 147.797px;">China</td>
<td style="text-align: center; width: 74.9531px;">12</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">3</td>
<td style="width: 262.578px;">
<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> </td>
<td style="width: 185.766px;">Consumer Discretionary</td>
<td style="width: 147.797px;">China</td>
<td style="text-align: center; width: 74.9531px;">92</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">4</td>
<td style="width: 262.578px;">
<a href="https://www.smartkarma.com/entities/yandex-nv-a" target="_blank" data-smartkarma-citation="entities:414:1" rel="noopener">Yandex (YNDX US)</a> </td>
<td style="width: 185.766px;">Communication</td>
<td style="width: 147.797px;">Russian Federation</td>
<td style="text-align: center; width: 74.9531px;">88</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">5</td>
<td style="width: 262.578px;">
<a href="https://www.smartkarma.com/entities/china-resources-land-ltd" target="_blank" data-smartkarma-citation="entities:418:1" rel="noopener">China Resources Land (1109 HK)</a> </td>
<td style="width: 185.766px;">Real Estate</td>
<td style="width: 147.797px;">China</td>
<td style="text-align: center; width: 74.9531px;">33</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">6</td>
<td style="width: 262.578px;">
<a href="https://www.smartkarma.com/entities/ambev-sa" target="_blank" data-smartkarma-citation="entities:24454:1" rel="noopener">Ambev SA (ABEV3 BZ)</a> </td>
<td style="width: 185.766px;">Consumer Staples</td>
<td style="width: 147.797px;">Brazil</td>
<td style="text-align: center; width: 74.9531px;">56</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">7</td>
<td style="width: 262.578px;">
<a href="https://www.smartkarma.com/entities/ncsoft-corp" target="_blank" data-smartkarma-citation="entities:5169:1" rel="noopener">NCSOFT Corp (036570 KS)</a> </td>
<td style="width: 185.766px;">Communication</td>
<td style="width: 147.797px;">Korea (South)</td>
<td style="text-align: center; width: 74.9531px;">18</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">8</td>
<td style="width: 262.578px;">
<a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> </td>
<td style="width: 185.766px;">Communication</td>
<td style="width: 147.797px;">China</td>
<td style="text-align: center; width: 74.9531px;">61</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">9</td>
<td style="width: 262.578px;">
<a href="https://www.smartkarma.com/entities/hindustan-unilever-ltd" target="_blank" data-smartkarma-citation="entities:13828:1" rel="noopener">Hindustan Unilever (HUVR IN)</a> </td>
<td style="width: 185.766px;">Consumer Staples</td>
<td style="width: 147.797px;">India</td>
<td style="text-align: center; width: 74.9531px;">70</td>
</tr>
<tr>
<td style="text-align: center; width: 74.9062px;">10</td>
<td style="width: 262.578px;">
<a href="https://www.smartkarma.com/entities/maruti-suzuki-india-ltd" target="_blank" data-smartkarma-citation="entities:733:1" rel="noopener">Maruti Suzuki India (MSIL IN)</a> </td>
<td style="width: 185.766px;">Consumer Discretionary</td>
<td style="width: 147.797px;">India</td>
<td style="text-align: center; width: 74.9531px;">89</td>
</tr>
<tr><td colspan="5" style="text-align: left; width: 746px;"><em>Source: FactSet financial data and analytics, my estimates and calculations, Tensorflow, Keras, Google Colaboratory, pandas</em></td></tr>
</tbody>
</table><p><em>As usual, please feel free to reach out for the full output table, any questions, clarifications needed or suggestions.</em></p>

This insight provides the output, and an overview of our, machine learning-driven, proprietary GEM screening model, which takes a three-pronged approach to find the best medium-term long ideas within the top100 largest stocks in the MSCI GEM Index. The model is based on 1) a typical quantitative multifactor screening model, enhanced by two Artificial Intelligence Technology-based approaches using 2) a Deep Neural Network model, and 3) a Recurrent Neural Network model. This model, which has been developed and tweaked over the past 24 months (and implemented in its current state for &gt;12 months), has a solid real-world performance track record, which I set out in the detail below. Notable new entrants to the top decile this month include bottom-fishing in Chinese education through New Oriental Education (EDU US), Russian internet play Yandex (YNDX US), Brazilian beverages giant Ambev SA (ABEV3 BZ), and a rebound call on Tencent (700 HK).









rank
Name
Sector
Location
prev.


1

Tata Consultancy Svcs (TCS IN) 
Information Technology
India
19


2

Shenzhou Intl Group Holdings (2313 HK) 
Consumer Discretionary
China
12


3

New Oriental Education &amp; Technology Group (9901 HK) 
Consumer Discretionary
China
92


4

Yandex (YNDX US) 
Communication
Russian Federation
88


5

China Resources Land (1109 HK) 
Real Estate
China
33


6

Ambev SA (ABEV3 BZ) 
Consumer Staples
Brazil
56


7

NCSOFT Corp (036570 KS) 
Communication
Korea (South)
18


8

Tencent (700 HK) 
Communication
China
61


9

Hindustan Unilever (HUVR IN) 
Consumer Staples
India
70


10

Maruti Suzuki India (MSIL IN) 
Consumer Discretionary
India
89

Source: FactSet financial data and analytics, my estimates and calculations, Tensorflow, Keras, Google Colaboratory, pandas

As usual, please feel free to reach out for the full output table, any questions, clarifications needed or suggestions.

<h2>China News That Matters</h2><ul>
<li>We don’t need no (private) education</li>
<li>Evergrande, just not forever </li>
<li>China’s new man in Washington </li>
<li>PLA trains hard for Taiwan – and expands nukes?</li>
<li>The Chairman tours Tibet</li>
</ul><div class="content-remarks"><ul style="list-style-type: none;"><li><div>In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.</div></li></ul></div>

China News That Matters
We don’t need no (private) education
Evergrande, just not forever 
China’s new man in Washington 
PLA trains hard for Taiwan – and expands nukes?
The Chairman tours Tibet
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

Edtech/ Evergrande/ US-China/ Taiwan/ Tibet

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

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 - Key Investor Capitulates, Should the Rest Follow?

The “double reduction” crackdown has inflicted major pain on the USD38 billion AST industry. Weak hands have folded but TAL strives to pivot....

Jason Yap, CFA

Sino-US/ Tech/ Covid-19/ Exercise/ Babies

In my weekly digest, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and...

Diana Choyleva

Screening for GEMs: August 2021

This insight provides an overview of our, machine learning-driven, proprietary GEM screening model, based on a Multifactor model, a Deep Neural...

Wium Malan, CFA

Edtech/ Evergrande/ US-China/ Taiwan/ Tibet

In my weekly digest, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and...

Diana Choyleva

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

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