Technical corrections do not alter the long-term bullish trend. On October 8th, the Hong Kong stock market experienced a significant adjustment, with the Hang Seng Index falling by 9.4%, followed by a slight decline the next day. However, the increase since September still exceeds 15%. This correction is mainly due to the exit of short-term profit-taking positions, and the long-term bullish logic remains unchanged, with the "policy bull" trumpet still sounding.

The Zhitong Finance APP has learned that on October 8th, the State Council Information Office held a press conference on a package of incremental policies, and another press conference will be held on the 12th, where the Ministry of Finance will provide detailed information on fiscal policies and counter-cyclical adjustment efforts. In addition, to strengthen policy coordination, the central bank and the Ministry of Finance have established a joint working group and recently held the first official meeting of the group. The "monetary + fiscal" combination supports the improvement of the real economy and the macroeconomic fundamentals, driving the capital market to a long-term bull market.

The bull market cycle spans several quarters or even years, and short-term valuation corrections are seen by the market as a way to pick up passengers. However, in the long cycle, the focus of investment is on sector allocation. Undervalued sectors have become one of the core indicators of sector allocation. Speaking of undervaluation, it is inevitable to mention the Hong Kong education stocks. After several years of corrections under policy interference, most stocks have corrected by more than 70%, and the PB valuation is generally less than 1 times, especially in vocational education stocks, which are a real bargain.

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However, a bargain price does not mean that it is time to enter the market. Whether the industry and individual stocks are healthy and have a positive trend that can support the continuous rise in valuation? Let's delve into the investment opportunities in education stocks.

The wrongly killed vocational education sector "wind has come"

Education is the foundation of the country's prosperity and talent reserve. Compared with other industries, it has a high sensitivity to policy and strong policy guidance. Since the release of the draft in 2018, the basic education field has implemented a policy of national advancement and private retreat. In six years, the capitalization of K9 has been basically completed. In the fields of high school and vocational education, private capital participation is encouraged, and many supporting policies have been issued, including listing financing. However, under the trend of national advancement and private retreat, capital is cautious, and there is indiscriminate outflow from the entire education system, making the capital financing of the education sector not smooth.

In recent years, there are few newly listed education targets, and even those that are listed want to increase or issue bonds for financing, which is also relatively rare. External investors are cautious, and entering the market may result in huge losses. For example, the leader of vocational education, China Education Holdings (00839), conducted a placement increase in January 2023, issuing 147 million shares to Blue Sky and White Cloud at a price of 10.94 Hong Kong dollars per share. According to the current price, the loss amount reaches 795 million Hong Kong dollars, with a loss rate of more than 50%.

In fact, vocational education has always been supported by policies, such as the "Opinions on Promoting the High-quality Development of Modern Vocational Education" in 2021, the "Opinions on Deepening the Reform of the Modern Vocational Education System" in 2022, and the "Decision of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reform and Promoting Chinese-style Modernization" in 2024. These policy documents aim to promote the high-quality development of vocational education. Looking at the Hong Kong stock targets, the performance is very stable, showing double-digit growth.

However, the vocational education sector has been indiscriminately killed by the market, and its valuation has been falling all the way in the past six years, with targets with PB values less than 1 times everywhere. It is understandable for capital to avoid risks, and now the basic education sector has exhausted its bad news, and the "draft and double reduction" decapitalization has been basically completed. The industry has also been fully reshuffled, and the valuation of the vocational education sector will return to the fundamentals. In the bull market trend, the vocational education sector may attract "bargain hunting" value investors.

Despite the "bargain price" everywhere, the leader is still the first to look atAs the policy-driven "bull" continues to ferment, the market rapidly rises and then enters a short-term adjustment phase, during which investment opportunities in the vocational education sector will gradually be unearthed. According to the Smart Finance APP, more than 80% of vocational education stocks have a price-to-book (PB) value of less than 1 times, and their price-to-earnings (PE) ratios are generally below 10 times. Among the high-performing stocks, China Education Group Holdings (00839), New Higher Education Group (02001), and China United Education Group (00382) have PB ratios of 0.8, 0.8, and 0.7 times, respectively, with China United Education Group's PE ratio at a mere 3.9 times.

It is noteworthy that China Education Group Holdings, New Higher Education Group, and China United Education Group are among the few stable dividend-paying companies in the vocational education sector, with dividend payout ratios that are not low. In the first half of the fiscal year 2024, China Education Group Holdings' dividend payout ratio was 44.72%, with an average dividend payout exceeding 30% in the past, while China United Education Group's was 29.3%, with an average dividend payout exceeding 20%. Based on the current market value, the dividend yields of these three companies are all over 5%, which is significantly undervalued.

Looking at individual stocks, China Education Group Holdings is the leader in vocational education, with revenue of 3.28 billion in the first half of the fiscal year 2024, a year-on-year increase of 18.3%, maintaining double-digit growth. Adjusted net profit attributable to the parent company was 1.09 billion, a year-on-year increase of 4.5%, indicating a slight decline in profitability, but the adjusted net profit margin of 33.23% is still above the industry level. The company has strong organic growth, expands through new construction and acquisitions, and actively enters the overseas market, although the proportion of overseas revenue is low, at only 3.2%.

The company responds to policies by promoting industry-education integration to facilitate employment. Its schools are all located in industrial cluster areas such as the Chengdu-Chongqing economic circle, the Guangdong-Hong Kong-Macao Greater Bay Area, and the Hainan Free Trade Zone, where they hold a leading position in scale and reputation. They provide vocational education services to better serve local industries and economic development, incubating applied talents. Currently, the company's market value is 13.9 billion Hong Kong dollars, with a PE (TTM) of 8.6 times and a dividend yield of 6.1%.

New Higher Education Group also has strong organic growth capabilities, with total revenue of 1.31 billion in the first half of the fiscal year 2024, a year-on-year increase of 13.8%, and adjusted net profit attributable to the parent company of 426 million, a year-on-year increase of 7.6%, with a net profit margin of 32.5%, remaining stable and at a medium to upper level in the industry. In the 2023/2024 academic year, the total number of students enrolled was about 140,000, with a year-on-year increase of 2.7% in the number of new students, further optimizing the student structure and increasing the proportion of undergraduates.

In the 2023/2024 academic year, the total number of students enrolled was about 140,000, with a year-on-year increase of 2.7% in the number of new students, further optimizing the student structure and increasing the proportion of undergraduates. Additionally, the acceleration of the upgrade to undergraduate level at the Guizhou school, with the full launch of the third phase of construction, is expected to bring more undergraduate students, driving a double increase in student numbers and tuition fees, and driving sustainable revenue growth. The company has changed to annual dividend payments from the fiscal year 2024, with an expected maintenance of a high dividend payout ratio of 50%. The current market value of the company is 3.16 billion Hong Kong dollars, with a PE (TTM) of 4 times and a dividend yield of 5.2%.

In summary, the technical correction of the Hang Seng Index does not change the bull market expectation. The combination of monetary and fiscal policies will drive the growth expectation of the macroeconomy, thereby supporting the long bull. Under the policy-driven bull, undervalued potential sectors will be explored. The education sector is undervalued, especially the vocational education sector, with many high-performing stocks at "cabbage prices." However, market funds are limited, and leaders are often the first choice of institutions. China Education Group Holdings has a strong fundamental basis and is expected to achieve a return that exceeds the sector.