Seizing Opportunities in the Vocational Education Sector: Abundant "Bargain Prices," Performance Support for Right-Side Opportunities May Be Brewing

The Hong Kong stock market is experiencing a dual situation: on one side, there is a bustling trading environment for popular cyclical stocks, technology stocks, and new shares, while on the other side, some industry sectors are seeing persistently low trading volumes and little interest, including the education sector.

According to the Futu trading software, there are a total of 46 stocks in the Hong Kong education sector, yet the average daily trading volume for the entire sector is only around HKD 500 million, which is even lower than the trading volume of individual popular cyclical stocks. Most stocks have virtually no trading volume. Additionally, the entire sector's valuation continues to decline, with the leading company, CHINA EDU GROUP (00839), having seen its market value shrink by over 70% from its peak, and individual stock valuations resemble a stagnant pool of water.

In fact, as a sector highly sensitive to policy changes, investors have been closely monitoring policy developments. Recently, the news of Hunan International Economics University, a subsidiary of Yuhua Education, transitioning to a profit-making model has raised market expectations for vocational education policies, leading to a small rebound. However, this rebound is not sustainable, primarily due to the lack of clear policy benefits and significant pressure from trapped investors above, which suppresses the height of the rebound.

The education sector, especially vocational education, has performance support and receives long-term backing from national policies. When will it see a turning point amidst the low valuations?

Performance Maintains Growth, Right-Side Opportunities May Be Brewing

Looking back over the past five years of evolution in the education industry, the market has excessively overdrawn policy sensitivity. The capital restrictions on basic education and the deep surgical cuts to after-school tutoring have impacted the education sector like a nuclear bomb. From 2020 to 2024, the entire education sector has dropped nearly 70%. However, as negative factors begin to dull in 2025, market noise will dissipate, and the sector will warm up along with the broader market. Nevertheless, the education sector's increase this year is only 9%, far below the overall market.

From a trend perspective, the market will focus on education beyond high school, mainly due to: first, the declining birth rate and the promotion of domestic production leading to a continuous contraction in the scale of early childhood education, which in turn affects elementary school sizes; second, after reaching a peak in births in 2016, the population has been declining, and considering that students enter middle school at around 13 and high school at 16, it is expected that middle school enrollment will peak in 2029 and high school enrollment will peak in 2032, meaning there is still a six-year development cycle for high schools; third, the vocational education sector has a long-term upward cycle of 10 years, with continuous strengthening of policy support.

It is worth mentioning that in recent years, the rapid development of AI has made AI + education a mainstream application track. Currently, AI technology is mainly applied in teaching, lesson preparation, testing, and student learning, enhancing in-school education while also providing more opportunities for after-school training. This year, Deepseek has emerged, with the open-source Deepseek-R1 adapting to the education field, and companies like Gaotu, Xueda, and Youdao have all integrated it, marking a new opportunity for accelerated implementation of AI in domestic education.

As discussed above, from the perspectives of policy and demographic space, after-school training for high school and above will become the core application entry point for AI, especially in vocational skills training, where AI will generate greater productivity, driving the eligible labor population into a lifelong education era. The prospects for vocational education are particularly promising, with a long time cycle to reach peak enrollment, and in the future, supported by AI, the market space will expand, maintaining continuous growth potential  

More importantly, the performance of Hong Kong stock vocational education targets fully demonstrates the weak impact of negative policies. Over the past three fiscal years, they have maintained double-digit revenue growth, and the 2025 fiscal year has also basically achieved growth, with some targets also maintaining double-digit growth. Among them, China Edu Group (00839) has a compound revenue growth rate of 17.6% from 2022 to 2024, and a growth of 11.85% in the first half of the 2025 fiscal year. However, valuations have fallen in line with basic education and off-campus training, with the current PB values of vocational education targets generally below 0.5 times and PE values below 5 times.

In fact, the vocational education sector continues to be weak. On one hand, "market hotspots" have absorbed most of the market's existing funds, leading to a lack of funds in some sectors and liquidity issues in trading; on the other hand, policy signals are unclear, and the market lacks confidence. However, after stabilizing and showing a weak rebound over the past two years, opportunities for right-side layout are already in the brewing stage.

Valuation inflection point still needs confirmation, focus on undervalued high-dividend performance targets

The vocational education sector has a relatively solid bottoming out for three main reasons: first, the industry has chosen a policy of conserving energy and resources in recent years, with a shift from non-expansion and non-acquisition strategies, and some targets have begun to seek expansion routes; second, performance growth is stable, and dividend yields are generally high, providing strong support for low valuations; third, the IPO fundraising effect in Hong Kong is spilling over to other sectors, and well-performing, undervalued, high-dividend sectors are expected to see value discovery.

According to Zhitong Finance APP's observation through Futu, most vocational targets still choose to distribute dividends every year, with an average TTM dividend yield above 5%, and some exceeding 10%, such as Zhonghui Group (00382) at 11.48%, New Higher Education Group (02001) at 16.8%, and South China Vocational Education (06913) at 10.5%. In terms of valuation PE (TTM), Zhonghui Group, New Higher Education, and South China Vocational Education are only 2.5 times, 2.82 times, and 4.3 times, respectively.

So, can this widespread "bargain" be picked up? The answer is yes. Under the bottom mentality, the downside is limited, while the upside potential is very large, with returns greater than risks.

First, historical cases of "the same sector" can be found in the U.S. stock market, such as the Chinese concept stocks in the fintech sector, which were negatively impacted by the lending policy in 2019, leading to a valuation shrinkage of up to 90% from 2019 to 2022. In 2022, there were also widespread bargains, similar to the current Hong Kong vocational education sector, with PB generally below 0.5 times and PE (TTM) below 5 times, while also having performance support. It is worth noting that the fintech sector began to rebound around 2022, with the sector doubling in less than three years, and some targets even seeing a tenfold increase Although the Hong Kong and US markets are different, they share commonalities in value investing, leading to similar outcomes. The rotation of sectors and cyclical funds may cause the vocational education sector to stir.

Secondly, private vocational education has a high level of recognition, with most targets showing steady growth in student enrollment, revenue, and profitability. For example, in the 2022-2025 academic years, most targets such as CHINA EDU GROUP, China Spring, and China Kepei have maintained growth in student enrollment, and their performance has been quite good, with revenue maintaining double-digit compound growth. Among them, China Spring has shown strong profitability, with a net profit margin of 47.82% in the first half of the 2025 fiscal year, far exceeding industry levels.

Additionally, vocational education targets have attracted investors' attention through support from the capital markets. For instance, at the beginning of the year, New Higher Education received continuous increases in holdings from executives, Zhonghui Group highly bound talent and company development through equity incentives, and some targets like Chenlin Education repurchased shares to enhance shareholder returns. Meanwhile, CHINA EDU GROUP announced that it is promoting business transformation around four key areas: optimizing the undergraduate education platform, adjusting the secondary vocational education sector, strengthening project execution discipline, and expanding financial strength and financing channels.

As an industry leader, CHINA EDU GROUP leads in revenue growth, but its rapid expansion in recent years has led to an excessive accumulation of goodwill. The impairment of goodwill over the past two years has significantly impacted profitability, with a total impairment loss of 1.911 billion yuan in the 2024 fiscal year, causing a 69.7% drop in net profit for shareholders. However, after a one-time significant impairment, the future impact of goodwill on performance is expected to gradually diminish, and profitability is projected to recover in the 2025 fiscal year.

In summary, the capital market is experiencing a duality of extremes, with the vocational education sector continuously neglected by funds. However, sentiment is brewing, and with performance support, the sector's valuation is becoming more solid at the bottom. As performance continues to grow and market funds disperse, it is expected to attract value investors, with a focus on undervalued, high-dividend, and high-performance targets