Analyzing four small-cap opportunities appearing amid the regulatory storm.
● The regulatory and other uncertainties in the Chinese market directly impact sectors like fintech, gaming and education.
● Winners will be companies that have benefited from the regulatory change or captured the newly emerging opportunities.
● We are bullish on Hailiang Education, WiMi Hologram Cloud, 360 DigiTech and New Frontier Health and will explain the reasons in this article.
In May 2021, a public company in China valued at CNY 3 billion was rejected by the investors for a roadshow, because it is considered a small-cap share with limited liquidity. This fired up the capital market in China and brought the topic to debate again: should we treat a company solely based on market capitalization?
We think it is rather irrational to determine the long-term value of a company based on its current market cap. In this article, we will analyze four Chinese small-cap companies with outstanding capabilities and future prospects.
Hailiang Education is one of the largest educational service providers for primary, middle and high schools in China. By the end of March 31, the company had 41 schools in its network, of which 13 were owned or sponsored and 28 were under full management.
With the strategy of deploying in both domestic and international education, Hailiang Education has a continuously growing student scale and improving educational outcomes, which serve as its main engine to lead China's education sector. Among the most popular players in the K12 private school sector in China, Hailiang Education has been generating the highest revenue for its investors.
In the past years, Hailiang Education has been actively acquiring and cooperating with more private schools both domestically and globally to expand its network. K12 Education is critical for China which has set education development as a strategic priority. Therefore, the future market is expected to be substantial for Hailiang Education. What is more, the state has lately restricted off-campus educational training courses. This move will effectively shift many domestic educational companies into a non-profit model. Under these circumstances, Hailiang Education, a private school operator, is expected to benefit hugely.
360 DigiTech is a tech-empowered digital platform. By using data-driven technology, it enables financial institutions to provide better and targeted products and services to a broader consumer base.
Unlike many of its peers, the company is a pure SaaS platform that generates considerable revenue from technology services. In the third quarter of 2020, 360 DigiTech brought its net tech income to around 50% of the total income for 2020.
Embedded finance is a to-B business that is featured in 360 DigiTech's core strategy. It stands for tech-powered services, especially those in the risk management area. It is embedded into other Internet businesses, like Du Xiaoman Financial, DidiChuxing, Meituan, Xiaomi Finance, JD Digits, reaching tens of millions of potential users in a variety of consumer scenarios, such as online shopping, transportation and food delivery.
Also, 360 DigiTech's to-B business has seen an expansion of the client base that has helped the company maintain the leading position in the sector. We believe to-B business is the technological advancement that will support the company to maintain its high and steady growth in the future.
What is more, the latest antitrust regulation wave is going to further benefit smaller fintech platforms, represented by 360 DigiTech.
WiMi Hologram Cloud is one of China's top holographic Cloud technical solution providers that focuses on AR automotive HUD software, 3D holographic pulse LiDAR and holographic microelectronics. Frost & Sullivan, for instance, described WiMi's holographic AR application platform as one covering the most comprehensive set of AR products in China.
WiMi reported a 140% year-over-year increase in revenue from CNY 319 million in 2019 to CNY 766 million in 2020. The net income before the impact of stock compensation expenses was CNY 40.3 million in 2020, presenting a decreasing trend mainly due to a 362.8% increase of R&D expenditure.
Also, with the increasing application solutions demand on the 3D vision-related semiconductors, WiMi broke into the market. WiMi's 56% of the 2020 revenue was contributed by its semiconductor business, which was just launched in July of that year. Along with the rise in the Chinese semiconductor industry that is vigorously supported by the state, the business is going to build a new growth curve for WiMi.
New Frontier Health, the parent company of one of Asia's largest high-end medical service providers – United Family Healthcare, offers customized healthcare services. The company includes over 600 full-time doctors from 25 countries, over 1,000 part-time specialists and over 1,000 nurses.
In early 2020, the COVID-19 outbreak affected the company's business. resulting in a lower income level at the pediatric and O.B departments that year. However, it is clear now that New Frontier is recovering from the pandemic with growing revenue, narrowing net losses and upping EBITDA, while it has been dropping operating expenses. It is proven that the overall operational efficiency and profitability have been improved.
In February of 2021, the buying party of New Frontier made a privatization offer to buy back all the common stocks at USD 12 per share, to delist the company from the NYSE. The next step will be the IPO on the Hong Kong bourse.
Aging China presents new growth opportunities for private healthcare companies. the planned exchange 'migration' may also help the company to overcome undervaluation in the US capital market and gain more recognition from the local investors in Hong Kong.
Disclaimer: This article's content is intended to be used solely for informational and educational purposes, and not as investment advice. Always do your research and consider your personal circumstances before making investment decisions. EqualOcean is not liable for any losses that may arise from relying on the information provided.