Shares of China's largest tutoring companies are up more than 300% from their lows. There is no denying that the Chinese government's blockade of the entire tutoring industry has collapsed this market, which was estimated to be worth approx. USD 120 billion. What is the situation of companies operating in this industry and why have they become a source of interest for Hedge Funds?
TAL Education
Tal Education Group (TALE), a company that helped children learn during the difficult time of the pandemic, experienced a drop in revenue of more than 84% and the near suspension of its core business a year and a half ago, resulting in its largest loss ever. The Wall Street Journal website characterises the company's current operations as follows: "TAL Education Group has been selling online-learning materials and providing technology solutions to schools."
Source: Conotoxia MT5, TALE, Daily
The company now appears to be managing to reduce its net loss quarter-on-quarter - to USD 51 million in Q3 2022 - and may be prioritising cost optimisation and debt repayment. The loss from operations fell by 69.7% year-on-year, the volume of debt in turn fell by 5% year-on-year. and now stands at USD 855 million. The $3.3bn in cash that the company can use to continue restructuring and enter new markets could be a lifesaver. Tal Education Group's capitalisation currently stands at USD 4.63 billion, which means that as much as 71% of its value is cash held. From this, it could be concluded that the company currently has a low probability of insolvency with the potential for successful restructuring.
New Oriental Education & Technology with interest from Hedge Funds
The second company in China's private teaching industry to gain significantly from the slump in this market is New Oriental Education & Technology (NewOriental). Here, shares are already up 380% since the bottom, the company's CEO conveyed in its H1 2022 quarterly report: "It is encouraging to see a continuously strong momentum of our overall business in the second fiscal quarter of this year, which marks a fresh start after downsizing throughout the last fiscal year. Our remaining key businesses started to show a steady trend of recovery after several years of pandemic disruption. In this fiscal quarter, our overseas test preparation and overseas study consulting businesses increased by approximately 17% and 14% year over year, respectively. Simultaneously, our educational new business initiatives sustained a strong growth and generated meaningful profit in this fiscal quarter." New Oriental Education & Technology, in contrast to TAL Education, has posted positive earnings in the last reported two quarters. The company has US$4.2 billion in cash and no debt. Its revenues have now managed to recover to half of their pre-collapse value. The company is currently valued at USD 7 billion, which means that as much as 60% of its value is cash. It seems that, as with TAL Education, the company is currently showing no signs of insolvency risk.
Source: Conotoxia MT5, NewOriental, Daily
The Bloomberg portal reports, "Hedge funds now have become one of the biggest investor groups of New Oriental — some 36% of publicly disclosed American Depository Receipts of the company were controlled by such investors in December, up from less than 5.6% in October 2021. The hedge funds were initially attracted by the cheap valuation, and bet on the Beijing-based company’s ability to win market share and pricing power after smaller competitors retreated." Hedge funds are the company's five largest shareholders. The largest of these is Baupost Group, Inc (holding 3.41%). They also include the Renaissance Technologies, LLC fund (holding 2.24%) run by what is considered one of the top managers Jim Simons. Sean Ho, manager of one of these funds, states: "New Oriental’s test and English language preparation, book publishing, and corporate training businesses remain unaffected, Ho says, despite the regulatory overhaul wiping out about 50% of its revenue. The firm’s management has paid off all its accounts receivables, started a live-streaming e-commerce business, and shifted the focus of its education segment to non-school curriculum subjects and 10th to 12th grades. It now offers a range of hobby group sessions, ranging from music to chess, calligraphy and dance classes. It’s also been able to charge higher rates than competitors”.
However, the industry as a whole seems further exposed to the possible negative impact of possible regulation from the Chinese government. Current valuations of companies in the sector may have the basis to develop new business models with an appropriate level of financial security.
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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