Telco/Internet specialist

Kirk Boodry

Redex Research

Equity Bottom-Up

<ul>
<li>Didi shares jumped 24% on reports regulatory relief was at hand. That is good news for Softbank although the halo effect boosting Alibaba had more of a valuation impact</li>
<li>Less noticed but also relevant as a potential outcome is the de-listing of Zhangmen Education which fell 50% Monday and is down 97% for VF in total</li>
<li>Softbank shares trade at a 43% discount to fair value and remain range-bound.  Tech market sentiment remains the primary driver and we continue to be cautious</li>
</ul>


Didi shares jumped 24% on reports regulatory relief was at hand. That is good news for Softbank although the halo effect boosting Alibaba had more of a valuation impact
Less noticed but also relevant as a potential outcome is the de-listing of Zhangmen Education which fell 50% Monday and is down 97% for VF in total
Softbank shares trade at a 43% discount to fair value and remain range-bound.  Tech market sentiment remains the primary driver and we continue to be cautious


Softbank Group - Didi Relief and ZME Pain Highlight Multiple Potential Outcomes

<p>Softbank has been touting Vision Fund’s IPO flywheel for almost all of 2021 but expect that to fade as the reality of China’s crackdown sinks in. It’s stake in Didi is worth $8bn as of Friday down from $10.6bn invested at the parent and $12bn total whilst other recent IPOs (YMM -28% on 23 July, ZME -35%, DDL -8%) are also under pressure. The good news is Vision Fund China assets are &lt;10% of total China exposure and Alibaba has been through the regulatory wringer already. That limits China downside but it does call into question Vision Fund hopes for valuation gains from liquidity events. There is a direct read across with Zuoyebang and VIPThink which are banned from going public whilst three of the largest private investments remaining in Vision Fund 1 (Bytedance, ele.me and Guazi) are likely to remain on the sidelines. We expect the holding company discount is likely to remain in the 44% range.</p>

Softbank has been touting Vision Fund’s IPO flywheel for almost all of 2021 but expect that to fade as the reality of China’s crackdown sinks in. It’s stake in Didi is worth $8bn as of Friday down from $10.6bn invested at the parent and $12bn total whilst other recent IPOs (YMM -28% on 23 July, ZME -35%, DDL -8%) are also under pressure. The good news is Vision Fund China assets are &lt;10% of total China exposure and Alibaba has been through the regulatory wringer already. That limits China downside but it does call into question Vision Fund hopes for valuation gains from liquidity events. There is a direct read across with Zuoyebang and VIPThink which are banned from going public whilst three of the largest private investments remaining in Vision Fund 1 (Bytedance, ele.me and Guazi) are likely to remain on the sidelines. We expect the holding company discount is likely to remain in the 44% range.

Softbank Group - China Has Just Blown a Hole in Vision Fund’s Rapid Listing Theme

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Earlier today, it was reported by the 21st Century Business Herald that China was going to ban IPOs by educational companies and platforms which tutor on subjects in the public school curriculum and ban investments in such companies by those which are already listed. </p><p><a href="https://www.bloomberg.com/news/articles/2021-07-23/china-is-said-to-mull-turning-tutoring-firms-into-non-profits" target="_blank" rel="noopener">Bloomberg</a> reported that China was considering asking companies that offer such tutoring - to help students pass the gaokao - the legendarily difficult college entrance exams - to turn into non-profit businesses. </p><p>The initial story is that online education platforms would not be allowed to raise money in capital markets, sell securities, go public. The bigger picture is that they are effectively being pushed out of business. This particular news has sent education (especially school curriculum tutoring platforms) stocks dramatically lower in Hong Kong trading, and in the US pre-open market.</p><p>Drops of 30-50% are par for the course so far.</p><p>There is a possibility this kills the entire business for some platforms. </p><p>This comes on the back of a crackdown starting earlier this spring on after-school tutoring platforms after Xi Jinping said in March at the Two Sessions that the practice was a "social problem" affecting kids social and mental health and he urged "<a href="http://epaper.chinadaily.com.cn/a/202105/19/WS60a43ecca31099a23435630e.html" target="_blank" rel="noopener">resolute rectification</a>."</p><p>Right there, that should have warned everyone this story was not going to have a happy ending. </p><p>This followed a scandal in January where four schools, including Yuanfudao, Zuoyebang, and the education unit all hired the same actress to pose as a teacher in ads for their platform, in at least one video <a href="https://www.bloomberg.com/news/articles/2021-05-30/china-wrecks-ipo-plans-for-high-flying-online-education-startups" target="_blank" rel="noopener">laying the guilt on parents</a> saying if parents didn't sign up for the streaming courses, it could have consequences, "90% of mothers make mistakes" and "it could be parents themselves who ruin their kids [chances]." In one she was an English teacher with 35 years experience. In another she had been a math teacher all her career. It was not a good look.</p><p>The media followed Hi Jinping's comments with polemics on predatory practices and fear-based advertising, which had gone rampant as the VC investees aimed at growth above all. This put an immediate halt to the preparations many of the mega-tech conglomerates invested in China - <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>, <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>, <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a>, and others - had made to list their education-related projects such as Zuoyebang (Alibaba) which raised US$2.35bn in two rounds last year, Yuanfudao (Tencent) which raised US$3.5bn in three rounds, VIPKid (Tencent) which does English teaching, Huohua Siwei (Tencent) which specialises in STEM, and others which were either launching (like ByteDance's newest <a href="https://www.techinasia.com/bytedances-10000employee-bet-edtech-bubble" target="_blank" rel="noopener">effort</a> Dali Education after buying Hua Luogeng math school and renaming it Qingbei Online School, and one-on-one tutoring platform GoGoKid), or preparing themselves to start on the road to IPO or at least looking at a 2022 listing. <a href="https://www.smartkarma.com/entities/shanghai-zhangxiaomen-education-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:33383:1" rel="noopener">Zhangmen Education (ZME US)</a> actually IPOed in late May at US$11.51/ADR, rising 50% on Day 1, falling back to US$9.54 yesterday and now down 26% in pre-market. </p><p>Such companies had grown dramatically in 2020 as covid restrictions, or precautions, increased the desire for parents to keep their kids at home. Preqin says VC funding in the sector hit a record $10.5bn in 2020. The market is huge, and growing fast. Online tutoring grew 35-40% last year as covid struck according to iResearch in Shanghai, reaching RMB 257bn. Others have higher numbers. And according to Oliver Wyman and the National Institute of Educational Sciences, the overall market for after-school education was RMB 800bn in 2019, expected to rise to RMB 1.4trln in 2025.</p><p>The four major problems that regulators appear to have focussed on this spring after Xi Jinping's comments were:</p><ul><li>fast-increasing expense on families, which would restrict the incentive to have more kids and also create a significant separation between the chances for kids with well-to-do parents and kids without. The criticism in the 21 May <a href="https://news.eol.cn/yaowen/202105/t20210521_2112236.shtml" target="_blank" rel="noopener">19th Meeting of Central Comprehensive Deepening Reform Commission</a>, which released a flurry of Opinions* was that children faced a lower burden in school and a greater burden out of school.</li></ul><div class="content-remarks"><p style="padding-left: 25px;">*"Guiding Opinions on Improving the Evaluation Mechanism of Scientific and Technological Achievements", "Opinions on Further Reducing the Burden of Students' Homework and Off-campus Training in Compulsory Education", and several others.</p></div><ul>
<li>marketing free-for-all with false or damaging advertising and predatory plan pricing and structuring, including pre-charging for classes which would not be used. </li>
<li>A lack of regulation/strict oversight of teacher/tutor licensing, ensuring proper resource allocation to teachers themselves, </li>
<li>and a get-rich-quick mindset from what Xi Jinping thinks should be a solemn duty to educate the youth of the country. </li>
</ul><p>As Xinhua put it in reporting about that May 21 meeting...</p><blockquote>
<p>会议强调，要全面规范管理校外培训机构，坚持从严治理，对存在不符合资质、管理混乱、借机敛财、虚假宣传、与学校勾连牟利等问题的机构，要严肃查处。要明确培训机构收费标准，加强预收费监管，严禁随意资本化运作，不能让良心的行业变成逐利的产业。要完善相关法律，依法管理校外培训机构。各级党委和政府要强化主体责任，做实做细落实方案，科学组织、务求实效，依法规范教学培训秩序，加强权益保护，确保改革稳妥实施。</p>
<p>The meeting emphasized that it is necessary to fully regulate the management of off-campus training institutions, adhere to strict governance, and severely investigate and deal with institutions that have problems such as non-qualification, chaotic management, taking advantage of money, false propaganda, and collusion with schools for profit. It is necessary to clarify the charging standards of training institutions, strengthen the supervision of pre-charging, and <strong>strictly prohibit arbitrary capitalization operations, and do not allow conscientious industries to become profit-seeking industries.</strong> It is necessary to improve relevant laws and manage off-campus training institutions in accordance with the law. Party committees and governments at all levels must strengthen their main responsibilities, implement the plan in detail, organize scientifically, seek practical results, standardize the order of teaching and training in accordance with the law, strengthen the protection of rights and interests, and ensure the steady implementation of reforms.</p>
</blockquote><p>In April, the Beijing Administration for Market Regulation fined New Oriental Online RMB 500,000 for pricing violations, and false advertising. <a href="https://www.smartkarma.com/entities/koolearn-technology-holding" target="_blank" data-smartkarma-citation="entities:27796:1" rel="noopener">Koolearn (1797 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>, were also hit.  <a href="https://www.smartkarma.com/profiles/shifara-samsudeen-acma-cgma" target="_blank" data-smartkarma-citation="accounts:3297" rel="noopener">Shifara Samsudeen, ACMA, CGMA</a> wrote about this in <a href="https://www.smartkarma.com/insights/gsx-techedu-china-fines-online-tutoring-apps-for-making-misleading-claims-is-gsx-next" target="_blank" data-smartkarma-citation="insights:51276" rel="noopener">GSX TechEdu: China Fines Online Tutoring Apps for Making Misleading Claims; Is GSX Next?</a> in early May.</p><p>In late May, China decided kindergartens and private tutoring schools could no longer teach the elementary school curriculum, starting June 1, as part of a <a href="https://www.bloomberg.com/news/articles/2021-06-09/why-china-s-cracking-down-now-on-education-tech-firms-quicktake?sref=P6xXtEaF" target="_blank" rel="noopener">revision of the Minority Protection Law</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> immediately announced it was shutting down its Xiao Zao Qi Meng pre-school education business (3-8yrs). On June 1, the government fined another 15 operators a total of <a href="https://www.reuters.com/article/china-education-fines-idUSL2N2NJ04A" target="_blank" rel="noopener">RMB 36.5mm</a> for similar violations to New Oriental Online, including pre-IPO unicorns Zuoyebang and Yuanfudao, with both getting hit for RMB 2.5mm which is the maximum legal amount. New Oriental got hit again. TAL, <a href="https://www.smartkarma.com/entities/onesmart-international-adr" target="_blank" data-smartkarma-citation="entities:26777:1" rel="noopener">Onesmart Education (ONE US)</a>, China BestStudy (3978 HK) and <a href="https://www.smartkarma.com/entities/bright-scholar-education" target="_blank" data-smartkarma-citation="entities:24126:1" rel="noopener">Bright Scholar Education (BEDU US)</a> were also hit for the same reasons by SAMR. And then another 10 were hit by local regulators in Guangdong and Shanghai. It was a coordinated attack on Children's Day.</p><p>In the first week of June, Xi Jinping made a <a href="http://www.xinhuanet.com/politics/2021-06/11/c_1127552138.htm" target="_blank" rel="noopener">much-touted visit to Qinghai</a> in the southwest and it appears both he and the media talked quite a bit about lifting up the lower income areas and people, as per the 14th Five Year Plan, and also noted the problem of after school tutoring burdening students more and school burdening students less, calling it "putting the cart before the horse."</p><p>The Ministry of Education set up a new department (the Off-Campus Education and Training Department) on 15 June to regulate the off-campus tutoring schools to "reduce students' academic burden", etc. It will oversee teachers and curricula. Smartkarma provider <a href="https://www.smartkarma.com/profiles/zhen-zhou-toh" target="_blank" data-smartkarma-citation="accounts:673" rel="noopener">Zhen Zhou, Toh</a> wrote about the prospects for companies going forward in late June in <a href="https://www.smartkarma.com/insights/china-online-education-diversified-revenue-stream-wins-here-balance-in-all-things" target="_blank" data-smartkarma-citation="insights:53529" rel="noopener">China Online Education - Diversified Revenue Stream Wins Here - Balance in All Things</a>. </p><p>Three weeks ago, the Beijing Municipal Education Commission and at least a half dozen other major cities across the country set up summer after-school programs for elementary school students, effectively taking the business which would normally be taken by private sector schools.</p><p>The writing has been on the wall since March. And the authorities have been writing over it in heavier and heavier marker for weeks and months.</p><p>The largest businesses out there have been under the cosh, racing against time and competitors with somewhat dodgy numbers and promises. They lose money, and now it looks like they won't be able to raise more. </p><p>A number of Smartkarma insight providers have published insights which have discussed the opportunities and the red flags in the sector. This includes short reports, pre-IPO reports, updates on legal and regulatory changes, and a huge report on the private education sector by <a href="https://www.smartkarma.com/profiles/osbert-tang-cfa" target="_blank" data-smartkarma-citation="accounts:3879" rel="noopener">Osbert Tang, CFA</a> a few months ago, called <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> which has an enormous amount of detail about the sector.</p><h2>Issues With the Business</h2><p>The major issues for regulators appear to be...</p><ul>
<li>criticisms of false advertising, where the benefits to such education are promised but not proven, where there are spurious claims using fake claims. </li>
<li>criticisms of the structure of the offerings. A number of courses are offered at RMB 1 for the whole course, but then they come back to charge you for extras later. </li>
<li>the "burden" placed on children</li>
<li>an air of get rich quick to the entire industry which is seen to be against the national interest.</li>
</ul><p>For investors, many of the major issues have to do with how companies which promise growth are actually "growing."</p><p>Gaotu, formerly called GSX Techedu, had claimed to be the leading provider of online classes from K-12, was IPOed in 2019 at a $3bn valuation, rose to 10x that, then fell. GSX had been the subject of short seller reports in the first half of 2020 accusing the company of inflating student enrolment numbers using bots, fabricating teachers, falsifying reviews, and falsifying revenues. Multiple reports (as per GMT Research's <a href="https://www.gmtresearch.com/en/about-us/hall-of-shame/gsx-techedu-gsx-us/" target="_blank" rel="noopener">Hall of Shame</a> on GSX, Grizzly Research, Muddy Waters, JLWarren who wrote 30 May on Smartkarma in <a href="https://www.smartkarma.com/insights/gsx-minimal-market-share-80-fake-enrollment-and-operational-irregularities" target="_blank" data-smartkarma-citation="insights:39890" rel="noopener">GSX: Minimal Market Share; ~80% Fake Enrollment and Operational Irregularities</a>, GMT itself, and others (links at the bottom of that link) found different former teachers or others who talked about faked reviews, faked parents, faked students, bots/brushing, related party transactions to create expenses, or remove them (depending on the short seller report), boosted to remove the cash that should have been there from the fake revenue, possible fake capital raise, etc. The laundry list of accusations is long, sordid, and painfully similar to situations which have later been determined to be fraud. </p><p>Against the pattern of companies calling out short seller research firms' reports, GSX was often curiously quiet, and the stock rose anyway, tripling after Muddy Waters released their report from $40/share to $120/share before falling back.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/220/210/original/Screenshot+2021-07-23+at+7.35.45+PM.png?1627040170" class="editor-image img-responsive" data-smartkarma-image-id="220210"></figure></section><p>The shares then rallied very sharply in January as part of a short squeeze on "meme stonks" and heavily-shorted names. Archegos apparently owned more than 10% through a variety of PB accounts. Archegos fell. GSX fell with it. And since then it has lost another two thirds of its value to get back to under US$10/share. </p><p>Pre-market, it is apparently indicated at US$3.65/share. Down 62%. </p><h2>A Side Problem</h2><p><a href="https://www.smartkarma.com/profiles/evelyn-zhang-9bc04495-920c-480f-b9e9-1c086391bea6" target="_blank" data-smartkarma-citation="accounts:21235" rel="noopener">Evelyn Zhang</a> recently wrote about the change in attitude towards "white collar education" in <a href="https://www.smartkarma.com/insights/a-twist-of-fate-china-s-suppression-of-secondary-education-in-favor-of-vocational-education" target="_blank" data-smartkarma-citation="insights:53904" rel="noopener">A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education</a>. It is a good read. </p><p>Her advice on 3 July was to short all Chinese online education stocks which had a K-12 offering, and go long all companies which provided vocational training.</p><p>After today, that will have been a beauty of a trade. </p><p>Medium-term, the problem authorities will find is that parents don't necessarily want their kids to not have access to the after-school cram services. They don't have time to teach them themselves, and because the cutoff to continue later education is harsh and many parents don't want their kids to go to vocational school to enter the blue collar workforce, lots of parents are actually objecting to the crackdown. They are happy to pay if it gives their kids a better chance. </p><p>The high cost of education is one reason to not have a second (or third) child. The high cost of real estate is another. But education is status and a chance at wealth and intellectual happiness. It has been the case for hundreds of years in China. It is not clear that if the public sector takes on the education and after-school education "burden" from the private sector that it will please the wider public. It is not clear an increased number of qualified teachers will want to get paid public education system wages either. </p><h2>The Problem For Investors</h2><p>Now the chickens are coming home to roost. </p><p>Xi Jinping declared after-school education to be a "social problem" in front of the Two Sessions. Some people did not take him seriously at the time, but regulators have been taking his words seriously and have started cracking down. Legislators have made new legislation. And the Ministry of Education has a new department. </p><p>Now it appears China wants foreign capital out of the business, and it wants those operators (already listed, or unicorns sponsored by China megatech) which have raised capital to not use it grow market share. </p><p>It wants the entire business to support the national interest. Without profit. </p><p>Larry Chen (founder and chairman of Gaotu), once a teacher in an impoverished little village, later become multi-billionaire, may not be able to keep his billions. And I expect this does not bother Xi Jinping.</p><p>A basket of names in HK, mainland China, and NYSE (using pre-market prices as of one minute before the open for today's price) is shown below. It is a heavy hit.</p><p>By my count using pre-open prices and the ugly HK closes, that is $18bn in one shot on those 16 names.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/220/249/original/Screenshot+2021-07-23+at+9.29.35+PM.png?1627046987" class="editor-image img-responsive" data-smartkarma-image-id="220249"></figure></section><p>More below the fold.</p>

Earlier today, it was reported by the 21st Century Business Herald that China was going to ban IPOs by educational companies and platforms which tutor on subjects in the public school curriculum and ban investments in such companies by those which are already listed. Bloomberg reported that China was considering asking companies that offer such tutoring - to help students pass the gaokao - the legendarily difficult college entrance exams - to turn into non-profit businesses. The initial story is that online education platforms would not be allowed to raise money in capital markets, sell securities, go public. The bigger picture is that they are effectively being pushed out of business. This particular news has sent education (especially school curriculum tutoring platforms) stocks dramatically lower in Hong Kong trading, and in the US pre-open market.Drops of 30-50% are par for the course so far.There is a possibility this kills the entire business for some platforms. This comes on the back of a crackdown starting earlier this spring on after-school tutoring platforms after Xi Jinping said in March at the Two Sessions that the practice was a "social problem" affecting kids social and mental health and he urged "resolute rectification."Right there, that should have warned everyone this story was not going to have a happy ending. This followed a scandal in January where four schools, including Yuanfudao, Zuoyebang, and the education unit all hired the same actress to pose as a teacher in ads for their platform, in at least one video laying the guilt on parents saying if parents didn't sign up for the streaming courses, it could have consequences, "90% of mothers make mistakes" and "it could be parents themselves who ruin their kids [chances]." In one she was an English teacher with 35 years experience. In another she had been a math teacher all her career. It was not a good look.The media followed Hi Jinping's comments with polemics on predatory practices and fear-based advertising, which had gone rampant as the VC investees aimed at growth above all. This put an immediate halt to the preparations many of the mega-tech conglomerates invested in China - Alibaba Group (BABA US), Tencent (700 HK), Softbank Group (9984 JP), and others - had made to list their education-related projects such as Zuoyebang (Alibaba) which raised US$2.35bn in two rounds last year, Yuanfudao (Tencent) which raised US$3.5bn in three rounds, VIPKid (Tencent) which does English teaching, Huohua Siwei (Tencent) which specialises in STEM, and others which were either launching (like ByteDance's newest effort Dali Education after buying Hua Luogeng math school and renaming it Qingbei Online School, and one-on-one tutoring platform GoGoKid), or preparing themselves to start on the road to IPO or at least looking at a 2022 listing. Zhangmen Education (ZME US) actually IPOed in late May at US$11.51/ADR, rising 50% on Day 1, falling back to US$9.54 yesterday and now down 26% in pre-market. Such companies had grown dramatically in 2020 as covid restrictions, or precautions, increased the desire for parents to keep their kids at home. Preqin says VC funding in the sector hit a record $10.5bn in 2020. The market is huge, and growing fast. Online tutoring grew 35-40% last year as covid struck according to iResearch in Shanghai, reaching RMB 257bn. Others have higher numbers. And according to Oliver Wyman and the National Institute of Educational Sciences, the overall market for after-school education was RMB 800bn in 2019, expected to rise to RMB 1.4trln in 2025.The four major problems that regulators appear to have focussed on this spring after Xi Jinping's comments were:fast-increasing expense on families, which would restrict the incentive to have more kids and also create a significant separation between the chances for kids with well-to-do parents and kids without. The criticism in the 21 May 19th Meeting of Central Comprehensive Deepening Reform Commission, which released a flurry of Opinions* was that children faced a lower burden in school and a greater burden out of school.*"Guiding Opinions on Improving the Evaluation Mechanism of Scientific and Technological Achievements", "Opinions on Further Reducing the Burden of Students' Homework and Off-campus Training in Compulsory Education", and several others.
marketing free-for-all with false or damaging advertising and predatory plan pricing and structuring, including pre-charging for classes which would not be used. 
A lack of regulation/strict oversight of teacher/tutor licensing, ensuring proper resource allocation to teachers themselves, 
and a get-rich-quick mindset from what Xi Jinping thinks should be a solemn duty to educate the youth of the country. 
As Xinhua put it in reporting about that May 21 meeting...
会议强调，要全面规范管理校外培训机构，坚持从严治理，对存在不符合资质、管理混乱、借机敛财、虚假宣传、与学校勾连牟利等问题的机构，要严肃查处。要明确培训机构收费标准，加强预收费监管，严禁随意资本化运作，不能让良心的行业变成逐利的产业。要完善相关法律，依法管理校外培训机构。各级党委和政府要强化主体责任，做实做细落实方案，科学组织、务求实效，依法规范教学培训秩序，加强权益保护，确保改革稳妥实施。
The meeting emphasized that it is necessary to fully regulate the management of off-campus training institutions, adhere to strict governance, and severely investigate and deal with institutions that have problems such as non-qualification, chaotic management, taking advantage of money, false propaganda, and collusion with schools for profit. It is necessary to clarify the charging standards of training institutions, strengthen the supervision of pre-charging, and strictly prohibit arbitrary capitalization operations, and do not allow conscientious industries to become profit-seeking industries. It is necessary to improve relevant laws and manage off-campus training institutions in accordance with the law. Party committees and governments at all levels must strengthen their main responsibilities, implement the plan in detail, organize scientifically, seek practical results, standardize the order of teaching and training in accordance with the law, strengthen the protection of rights and interests, and ensure the steady implementation of reforms.
In April, the Beijing Administration for Market Regulation fined New Oriental Online RMB 500,000 for pricing violations, and false advertising. Koolearn (1797 HK), TAL Education (TAL US), were also hit.  Shifara Samsudeen, ACMA, CGMA wrote about this in GSX TechEdu: China Fines Online Tutoring Apps for Making Misleading Claims; Is GSX Next? in early May.In late May, China decided kindergartens and private tutoring schools could no longer teach the elementary school curriculum, starting June 1, as part of a revision of the Minority Protection Law. Gaotu Techedu (GOTU US) immediately announced it was shutting down its Xiao Zao Qi Meng pre-school education business (3-8yrs). On June 1, the government fined another 15 operators a total of RMB 36.5mm for similar violations to New Oriental Online, including pre-IPO unicorns Zuoyebang and Yuanfudao, with both getting hit for RMB 2.5mm which is the maximum legal amount. New Oriental got hit again. TAL, Onesmart Education (ONE US), China BestStudy (3978 HK) and Bright Scholar Education (BEDU US) were also hit for the same reasons by SAMR. And then another 10 were hit by local regulators in Guangdong and Shanghai. It was a coordinated attack on Children's Day.In the first week of June, Xi Jinping made a much-touted visit to Qinghai in the southwest and it appears both he and the media talked quite a bit about lifting up the lower income areas and people, as per the 14th Five Year Plan, and also noted the problem of after school tutoring burdening students more and school burdening students less, calling it "putting the cart before the horse."The Ministry of Education set up a new department (the Off-Campus Education and Training Department) on 15 June to regulate the off-campus tutoring schools to "reduce students' academic burden", etc. It will oversee teachers and curricula. Smartkarma provider Zhen Zhou, Toh wrote about the prospects for companies going forward in late June in China Online Education - Diversified Revenue Stream Wins Here - Balance in All Things. Three weeks ago, the Beijing Municipal Education Commission and at least a half dozen other major cities across the country set up summer after-school programs for elementary school students, effectively taking the business which would normally be taken by private sector schools.The writing has been on the wall since March. And the authorities have been writing over it in heavier and heavier marker for weeks and months.The largest businesses out there have been under the cosh, racing against time and competitors with somewhat dodgy numbers and promises. They lose money, and now it looks like they won't be able to raise more. A number of Smartkarma insight providers have published insights which have discussed the opportunities and the red flags in the sector. This includes short reports, pre-IPO reports, updates on legal and regulatory changes, and a huge report on the private education sector by Osbert Tang, CFA a few months ago, called China Private Education: This Is Where the Future Lies which has an enormous amount of detail about the sector.Issues With the BusinessThe major issues for regulators appear to be...
criticisms of false advertising, where the benefits to such education are promised but not proven, where there are spurious claims using fake claims. 
criticisms of the structure of the offerings. A number of courses are offered at RMB 1 for the whole course, but then they come back to charge you for extras later. 
the "burden" placed on children
an air of get rich quick to the entire industry which is seen to be against the national interest.
For investors, many of the major issues have to do with how companies which promise growth are actually "growing."Gaotu, formerly called GSX Techedu, had claimed to be the leading provider of online classes from K-12, was IPOed in 2019 at a $3bn valuation, rose to 10x that, then fell. GSX had been the subject of short seller reports in the first half of 2020 accusing the company of inflating student enrolment numbers using bots, fabricating teachers, falsifying reviews, and falsifying revenues. Multiple reports (as per GMT Research's Hall of Shame on GSX, Grizzly Research, Muddy Waters, JLWarren who wrote 30 May on Smartkarma in GSX: Minimal Market Share; ~80% Fake Enrollment and Operational Irregularities, GMT itself, and others (links at the bottom of that link) found different former teachers or others who talked about faked reviews, faked parents, faked students, bots/brushing, related party transactions to create expenses, or remove them (depending on the short seller report), boosted to remove the cash that should have been there from the fake revenue, possible fake capital raise, etc. The laundry list of accusations is long, sordid, and painfully similar to situations which have later been determined to be fraud. Against the pattern of companies calling out short seller research firms' reports, GSX was often curiously quiet, and the stock rose anyway, tripling after Muddy Waters released their report from $40/share to $120/share before falling back.The shares then rallied very sharply in January as part of a short squeeze on "meme stonks" and heavily-shorted names. Archegos apparently owned more than 10% through a variety of PB accounts. Archegos fell. GSX fell with it. And since then it has lost another two thirds of its value to get back to under US$10/share. Pre-market, it is apparently indicated at US$3.65/share. Down 62%. A Side ProblemEvelyn Zhang recently wrote about the change in attitude towards "white collar education" in A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education. It is a good read. Her advice on 3 July was to short all Chinese online education stocks which had a K-12 offering, and go long all companies which provided vocational training.After today, that will have been a beauty of a trade. Medium-term, the problem authorities will find is that parents don't necessarily want their kids to not have access to the after-school cram services. They don't have time to teach them themselves, and because the cutoff to continue later education is harsh and many parents don't want their kids to go to vocational school to enter the blue collar workforce, lots of parents are actually objecting to the crackdown. They are happy to pay if it gives their kids a better chance. The high cost of education is one reason to not have a second (or third) child. The high cost of real estate is another. But education is status and a chance at wealth and intellectual happiness. It has been the case for hundreds of years in China. It is not clear that if the public sector takes on the education and after-school education "burden" from the private sector that it will please the wider public. It is not clear an increased number of qualified teachers will want to get paid public education system wages either. The Problem For InvestorsNow the chickens are coming home to roost. Xi Jinping declared after-school education to be a "social problem" in front of the Two Sessions. Some people did not take him seriously at the time, but regulators have been taking his words seriously and have started cracking down. Legislators have made new legislation. And the Ministry of Education has a new department. Now it appears China wants foreign capital out of the business, and it wants those operators (already listed, or unicorns sponsored by China megatech) which have raised capital to not use it grow market share. It wants the entire business to support the national interest. Without profit. Larry Chen (founder and chairman of Gaotu), once a teacher in an impoverished little village, later become multi-billionaire, may not be able to keep his billions. And I expect this does not bother Xi Jinping.A basket of names in HK, mainland China, and NYSE (using pre-market prices as of one minute before the open for today's price) is shown below. It is a heavy hit.By my count using pre-open prices and the ugly HK closes, that is $18bn in one shot on those 16 names.More below the fold.

China After School Tutoring Online Education Stocks Crushed - Investors Schooled

Research on Tech Companies

Evelyn Zhang

Thematic (Sector/Industry)

<p>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.</p>

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

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

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 Capital Markets

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<p><a href="https://www.smartkarma.com/entities/didi-chuxing-inc" target="_blank" data-smartkarma-citation="entities:27467:1" rel="noopener">DiDi Chuxing (DIDI US)</a>, the world’s largest mobility technology platform, raised around US$4.4bn in its US listing. It is backed by <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>, along with other investors.</p>
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<p>We have covered the deal background and financials overview in our previous notes<a href="https://www.smartkarma.com/insights/didi-chuxing-pre-ipo-one-of-asia-s-largest-ipos-this-year-tearsheet" target="_blank" rel="noopener"></a>:</p>
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<a href="https://www.smartkarma.com/insights/didi-chuxing-pre-ipo-one-of-asia-s-largest-ipos-this-year-tearsheet" target="_blank" rel="noopener">DiDi Chuxing Pre-IPO - One of Asia’s Largest IPOs This Year - Tearsheet</a>.</li>
<li><a href="https://www.smartkarma.com/insights/didi-chuxing-pre-ipo-has-a-principal-agent-problem-rumoured-target-valuation-is-a-stretch" target="_blank" rel="noopener">DiDi Chuxing Pre-IPO - Has a Principal Agent Problem, Rumoured Target Valuation Is a Stretch</a></li>
<li><a href="https://www.smartkarma.com/insights/didi-pre-ipo-competitive-in-car-hailing-uncompetitive-in-others-generally-valuable" target="_blank" rel="noopener">DIDI (滴滴) Pre-IPO: Competitive in Car Hailing, Uncompetitive In “Others”, Generally Valuable</a></li>
<li><a href="https://www.smartkarma.com/insights/didi-chuxing-pre-ipo-peer-comparison" target="_blank" rel="noopener">DiDi Chuxing Pre-IPO - Peer Comparison</a></li>
<li><a href="https://www.smartkarma.com/insights/didi-chuxing-pre-ipo-valuation" target="_blank" rel="noopener">DiDi Chuxing Pre-IPO - Valuation</a></li>
<li><a href="https://www.smartkarma.com/insights/didi-chuxing-pre-ipo-bull-case-index-inclusion-uber-exit" target="_blank" rel="noopener">DiDi Chuxing Pre-IPO - Bull Case, Index Inclusion, Uber Exit</a></li>
<li><a href="https://www.smartkarma.com/insights/didi-chuxing-ipo-at-fair-value-with-partial-lock-up-and-index-inclusion-pulling-it-either-way" target="_blank" rel="noopener">DiDi Chuxing IPO - At Fair Value, with Partial Lock-Up and Index Inclusion Pulling It Either Way</a></li>
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<p>In this note, we will talk about the trading dynamics.</p>
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DiDi Chuxing (DIDI US), the world’s largest mobility technology platform, raised around US$4.4bn in its US listing. It is backed by Softbank Group (9984 JP) and Tencent (700 HK), along with other investors.


We have covered the deal background and financials overview in our previous notes:




DiDi Chuxing Pre-IPO - One of Asia’s Largest IPOs This Year - Tearsheet.
DiDi Chuxing Pre-IPO - Has a Principal Agent Problem, Rumoured Target Valuation Is a Stretch
DIDI (滴滴) Pre-IPO: Competitive in Car Hailing, Uncompetitive In “Others”, Generally Valuable
DiDi Chuxing Pre-IPO - Peer Comparison
DiDi Chuxing Pre-IPO - Valuation
DiDi Chuxing Pre-IPO - Bull Case, Index Inclusion, Uber Exit
DiDi Chuxing IPO - At Fair Value, with Partial Lock-Up and Index Inclusion Pulling It Either Way



In this note, we will talk about the trading dynamics.


DiDi Chuxing IPO Trading - Upsize Will Ensures Index Inclusion, Lock-Up Remains a Wildcard

China

Shanghai Zhangxiaomen Education Technology Co. Ltd. provides educational services. The Company offers personal counseling, educational information consolidation, and other services. Shanghai Zhangxiaomen Education Technology also develops education technologies.

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Zhangmen Education (ZME US)

Softbank Group - Didi Relief and ZME Pain Highlight Multiple Potential Outcomes

Good news on Didi and recent gains for Coupang and Goto highlight the potential for Vision Fund companies to re-rate although the delisting of...

Kirk Boodry

Softbank Group - China Has Just Blown a Hole in Vision Fund’s Rapid Listing Theme

Softbank has been touting Vision Fund’s IPO flywheel and 4 of 6 recent listings have been Chinese but that is fading as the reality of China’s...

Kirk Boodry

China After School Tutoring Online Education Stocks Crushed - Investors Schooled

China Online Education names are down heavily in HK today and NY this AM as Chinese authorities look to take foreign capital, and possibly profit...

Travis Lundy

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

DiDi Chuxing IPO Trading - Upsize Will Ensures Index Inclusion, Lock-Up Remains a Wildcard

DiDi Chuxing (DIDI US), the world’s largest mobility technology platform, raised around US$4.4bn in its US listing. It is backed by Softbank Group...

Sumeet Singh

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