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TAL Education Kicks Off Earnings Season With A Hansel & Gretel

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KraneShares Green Week continues with the launch of our Global carbon allowance ETF today and the launch of our China ESG ETF yesterday.

Key News

Asian equities were up out of the gate on Fed Chair Powell’s positive comments but the reality of coronavirus flare ups turned the tide south as the trading day went on. Korea and Taiwan managed to shake the regional funk with gains as Korean-listed Naver reported positive results. Hong Kong was off a touch -0.69% led by volume leaders Tencent -1.2%, Alibaba HK +0.74%, Semiconductor Manufacturing -1.4% Meituan Dianping +1.04%, Ping An -0.78%, AIA -2.41%, and HK +0.42%. Meanwhile, NetEase HK fell -0.78%. Gold lifted materials while health care outperformed. Budweiser Brewing Co APAC (1876 HK, love that ticker, 1876 is the year Budweiser was founded) rose +4.9%, proving that alcohol belongs in the consumer staples sector after posting better than anticipated earnings. The volume leader on the Mainland was Kweichow Moutai, which gained +0.48% followed by fellow liquor company Wuliangye Yibin +0.62% as the DND trade moves higher once again. Foreign investors were net sellers of Mainland stocks today.

Back in early 2013, I flew to Beijing with Jonathan Krane for the first time. We visited with the CSRC, China’s SEC, and the State Administration of Foreign Exchange (SAFE), about listing an A-Share product on the NYSE. The meetings went great and led to our China A-Shares launch back in March 2014. 

One fun moment was walking out of the CSRC building as a group of University of Southern California graduate students, and their guides walked in. I could tell they were like, who are these two Americans walking out high fiving each other with big smiles? My wife is an Arizona State University graduate, so I flashed them the ASU Devil’s pitchfork sign leading to even more shoulder shrugs from the Trojans. 

We then flew to Hong Kong during a crazy thunderstorm, which Jon slept through as I white-knuckled the armrest, to meet with the Hong Kong regulator, the SFC. We then drove from Hong Kong to Shenzhen that night following a day of meetings. On the way to Shenzhen, I recall driving through massive housing complexes at night. Upon returning to the US, my friend John said, those were the ghost cities, to which I replied: “no, I could see the laundry hanging from the windows.” 

I was right, and those were no ghost cities. Instead, we had driven past the homes of tens of millions of people. After seeing those apartment buildings from Hong Kong to Shenzhen, I said to myself if you can make a washing machine and drier for China, you’ll make Bill Gates look like a pauper. Six months later, US private equity firm KKR bought a piece of Chinese washing machine maker Haier (119 HK). So close and yet so far, but a good lesson that a good idea is only useful if you implement it. Today, trading in appliance maker Haier's stock was halted in Hong Kong after the company's purchase of GE Appliances for $5.6 billion.

TAL Education (TAL US) reported fiscal year 2021 Q1 earnings this morning. The release has a little bit of everything good and bad, which is why I call it a Hansel & Gretel: not too hot, not too cold. Good: topline growth was great, enrollment increased, profit increased. Bad: expenses ballooned and the forecast was a touch light. TAL has performed well this year gaining +62% YTD. When a stock is priced for perfection, the results better be perfect. TAL is great company with a great future and opportunity. This quarter’s results were fine, but short-term traders might be a disappointed.

  • Revenue +35.2% year over year to $910mm from $673.4mm versus estimate $885mm
  • Total Student Enrollments +72%
  • Operating costs and expenses $880mm +40.3%
  • Operating income declined -26.8%
  • Net Income $81.7mm versus a loss of -114.9mm
  • Adjusted EPS $0.18 versus estimate $0.07
  • Q2 Forecast $1.08B to $1.1B represents growth between 20% to 23%

Random thought. Are quarantines keeping miners from bringing commodities out of the ground? Less supply combined with increased demand could create a price spike. Just a thought.

H-Share Update

The Hang Seng was up all day but fell going into the close -0.69%/-172 index points at 24,710. Volume jumped 22% from yesterday above the 1 year average while 18 stocks advanced and 30 decliners. Index leaders were AIA -2.41%/-60 index points, Tencent -1.2%/-35 index points and China Construction Bank -1.54%/-29 index points. Today’s best performer CSPC Pharma +5.1% while today’s worst performer -2.68%/-2 index points. HK domiciled companies +0.2% while Chinese domiciled companies -0.86% using the HS HK 35 and China Enterprise indexes as proxies. The 205 Chinese companies within the MSCI China All Shares Index fell -0.48% with materials +1.73%, health care +1.65%, utilities +0.45%, discretionary +0.31%, tech +0.15%, industrials -0.0%, staples -0.0%, real estate -0.16%, energy -0.93%, communication -1.1%, and financials -1.38%.

Southbound Connect volumes were light though Mainland investors remained net buyers of Hong Kong stocks. Southbound Shanghai volume leaders were SMIC, which was flat on the day, Meituan Dianping, which was bought 5 to 1, and Tencent, which was bought 3 to 2. Mainland investors bought $719mm worth of Hong Kong stocks today as Southbound Connect trading accounted for 9% of Hong Kong trading.

A-Share Update

Shanghai and Shenzhen traded in a narrow range falling -0.23% and -0.43% to close at 3,286 and 2,227, respectively. Volume rose +4%, which is 1.5X the 1-year average while breadth was mixed with 1,478 advancers and 2,158 decliners. Large, mid, and small caps were off uniformly.  The 510 Mainland stocks within the MSCI China All Shares Index -0.43% led by staples +0.52%, health care +0.34%, materials +0.12%, industrials -0.25%, discretionary -0.36%, real estate -0.57%, energy -0.59%, utilities -0.62%, tech -0.95%, financials -1.26%, and communication -2.19%.

Northbound Stock Connect volumes were high, which is the new normal as foreign investors sold Mainland stocks. Shanghai Northbound volume leaders were China Tourism, which was sold by nearly 2 to 1, Kweichow Moutai, which was bought by 5 to 3, Longi Green Tech, which was sold by 3 to 1. Shenzhen Northbound volume leaders were Gree Electric Appliances, which was sold 2 to 1, East Money Information, which was sold 6 to 5, and Chongqing Zhifei Biological, which was flat on the day. Foreign investors sold -$905mm worth of Mainland stocks today as Northbound Stock Connect trading accounted for nearly 6% of Hong Kong trading.

Last Night’s Exchange Rates & Yields

  • CNY/USD 7.01 versus 7.00 yesterday
  • CNY/EUR 8.26 versus 8.24 yesterday
  • Yield on 1-Day Government Bond 0.98% versus 1.02% yesterday
  • Yield on 10-Year Government Bond 2.94% versus 2.94% yesterday
  • Yield on 10-Year China Development Bank Bond 3.43% versus 3.43% yesterday