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Daily Commentary

20 July 2018

Market Outlook

HSI might fluctuate at around 27,600 and 28,200 points today.

The Hang Seng Index opened higher by 133 points yesterday and then grew 212 points to reach its intra-day high of 28,329 points. Afterwards, the market narrowed its gains significantly and once dropped 50 points. During the afternoon session, HK stocks further extended its losses and decreased 119 points at most to touch its intra-day low of 27,998 points. The HSI finally closed at 28,010.86 points, down 106.56 points or 0.38%, being its new closing-low since the late September 2017. Market turnover amounted to HKD77.419 billion. The ADR closed yesterday at 27,992points with 17 points lower than the closing price of HSI. Dow fell 134 points to 25,064 points. HSI may fluctuate at around 27,600 to 28,200 points today.

Today’s A-share Snapshot

Company’s Profile:KAILE TECH (600260.SH) mainly develops, manufactures and distributes private network communication products, optical fiber, optical cable, communication silicon tube and quantum secret communication.

Brief Comments:

Business catalysts:The Company proposed to make strategic cooperation with the self-choice doctor team of National University of Devense Technology; Kaile Quantum Communication, which is a subsidiary of the Company, planned to take part in the constructions of Smart Jingzhou and Jingchu Cloud platform. Besides, the two companies signed a sales framework contract for quantum secret data link communications terminal and quantum secret data link storage terminal equipments with relevant units. These are expected to be beneficial for the industrialization of the Company's quantum communication products.

The Company released a positive profit alert, expecting to record a net profit between RMB606.02 million and RMB623.34 million for 1H2018, up 75% to 80% YoY, amid the expanding market share and increasing gross profit margin of its private network communication products.

Risk factors:The high concentrations of the Company’s customer and supplier, coupled with the fierce competition in communication market, might increase uncertainties to the Company’s core business.

Stock Pick

CEG benefited by M&A and consistent tuition growth

China Education Group (00839) is one of the leading private higher and vocational education providers in China. Currently the company owns and operates 2 universities (namely Jiangxi University of Technology, Guangdong Baiyun University – both top ranked private universities in their respective provinces), 2 technician colleges (Baiyun Technician College and Xi’an Railway Technician College which are the No.1 and No.2 largest private technical colleges by enrollment in China) and one post-secondary vocational school (Zhengzhou City Rail Transit School). We believe that due to its high quality teaching outcome, consistent tuition fee growth and economies of scale through M&A strategy, we think its share price can outperform the index despite the potential economic softness in China.

CEG has specialized in private higher education and vocational trainings for over 2 decades. The Company has maintained an impressive initial employment rate of its school graduates over the years (around 93.1% initial employment rate in 2017), which can help attract more students. Secondly, revenue growth of its universities embraces high visibility with consistent growth in student tuition fee every year. Thirdly, the Company has the largest school network among the listed private higher education companies in China. We think the Company can enjoy economies of scale given its centralized management of curriculum development, recruitment, marketing and administration. Benefits can be magnified through M&A.

The Company announced in end of Jun that it has entered into an agreement with Value Partners to establish the China Education Fund. The Fund will be primarily used to invest in private higher education and vocational education with a focus on control investment. We think that CEG is taking a step further to capture market share by leveraging on the market consolidation trend using an asset-light model. Investors are advised to buy at or below HKD14, with target price of HKD17 and stop loss price of HKD13.


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