William Chang

TBC Fall 2018 Ambow Education Holding Ltd (NYSE: AMBO)

1. Summary of Thesis
 Setup: AMBO stock ($4.75/share) is down 41% from its 52-week high ($8.00/share) due to
overly harsh industry regulation rulings announced in July 2018, negative equity research
sentiment/being overlooked as a small-cap company ($100mm market cap), and weak
macro Chinese sentiment due to trade wars with US. However, the company shows
promising industry positioning and dynamics, and fundamentally strong competitive
advantages.
 Regulation Rulings: In July 2018, the General Office of the State Council released new
rulings that could increase the costs of after-school companies to protect consumers
(officially enacted August 22):
o Regulations on learning center approval processes
o Must have school operating permit and business license
o Dept. of Education in Jiangsu added teacher requirements since then: teachers
need additional qualifications and have required examination testing next year
(2019).
o These regulations have been overblown and equity research has overestimated
their effects (see “What is the Market Missing?”)
 Bearish equity research reports are overblown, some bad research has been done (see
“What is the Market Missing?”).
 Weak macro Chinese sentiment can be seen across the entire Chinese stock market,
including large players like BABA and comparable companies to AMBO like TAL. While this
does materially affect value of cross-border companies like BABA, it should not affect
companies that do not do business outside of China (i.e. AMBO).
o Concerns using US funding for Chinese companies as well (esp. debt). AMBO is well-
positioned against this risk since it has industry-low debt: 18% D/E.
 Promising Industry Positioning and Dynamics:
o Extremely competitive to get into college, getting more competitive every year
o After-school tutoring (“AST”) becoming very much the cultural norm
o Extremely fragmented industry – top 2 AST companies make up 3% of total market
share
o Heavy macro tailwinds:
 Growing middle class, growing urban cities in China
William Chang
TBC Fall 2018 Ambow Education Holding Ltd (NYSE: AMBO)

 Heavy cultural emphasis on education in China, with lots of room to grow

 Chinese consumption on education fraction of that of developed
countries such as Singapore, US, Korea, Canada, Japan
 Percentage of population aged 15+ with higher education degree
one-third of that of US (China = 12%, US = 35% in 2017)
 One-child policy abolished in 2015, predicted surge in youth population

2. Company Overview
 Ambow is a K-12 educational services company based in China that covers school education,
tutoring services, international education programs, and online educational offerings.
 Focuses on K-12 schools and brick-and-mortar after-school tutoring (“AST”) centers that
supplements child learning outside normal school hours.
 Additional service offerings include Ambow Bopo School, a 6-month test preparation course,
and Ambow International Education Programs, consulting services on international
education and global cultural exchange programs, vocational education, and enterprise
training.

3. What is the Market Missing?

 Fundamental misunderstanding the effects of regulation on AMBO.
o Citi overestimating effect of Jiangsu mandate, assuming that it would affect entirety
of China (NOT true, just Jiangsu).
o According to Chinese news, many teachers are rushing to take exams, and
ultimately this ruling hurts unestablished companies more than AMBO, who has
standard hiring processes.
 Equity research getting competition wrong.
o Citi, Jefferies cites fear of “promotional pricing” causing undercutting war leading to
industry-wide margin decreases.
o Competitors to AMBO, such as EDU and TAL, all have comparable prices and have
no indication of undercutting prices. This product has inelastic demand (AST is
almost required), so prices can stay high and be competitive.
 I would argue that prices can increase since regulation makes it difficult for
new players to enter the space.
William Chang
TBC Fall 2018 Ambow Education Holding Ltd (NYSE: AMBO)

 Macro events (i.e. China-US trade war situation) have hit the entire Chinese public
equities market in aggregate. This includes AMBO, who is not materially affected by such
trade wars.

4. Competitive Advantages
 Established player in industry with high barriers to entry: Owns 3 K-12 schools and has
partnerships with over 200 universities and 4000 private companies. Because of the new
regulations, new players will lose their ability to continue business, barriers to entry are
high, and established players will be able to absorb the rest of the “lost” market share.
 Physical tutoring sites well-positioned to capture market growth. Both AMBO’s schools
and AST centers are situated in cities that are seeing rapid development in population
density.

5. Catalysts
 Earnings beats: Market sentiment very bearish combined with strong tailwinds and
competitive advantages make it very obtainable to beat earnings estimates.
 Acquisition: Fast-growing demand in a fragmented industry make smaller, yet established
players very attractive acquisition targets.
 Heavy Growth Tailwinds: Macro tailwinds and competitive advantages that make it difficult
for newcomers to dilute market share make it advantageous for established players like
AMBO.

6. Valuation: See Excel file.