Picking up the education sector: "cabbage prices" everywhere, performance support may be brewing on the right side of the opportunity.

The Hong Kong stock market has two sides to it, with one side bustling with trading of popular cyclical stocks, technology stocks, and new listings, while the other side sees some industry sectors with persistently low trading volumes, including the education sector. According to Futu trading software, there are a total of 46 education-related stocks in the Hong Kong stock market, but the average daily turnover of the entire sector is only around HK$500 million, which is less than the turnover of a single popular cyclical stock. Most of the education stocks have little to no trading volume. The valuations of the entire sector have been on a downward trend, with the leading China Education Group (00839) seeing its market value shrink by over 70%. As a highly policy-sensitive sector, investors have been closely monitoring policy developments. The recent news of Yuhua Edu's Hunan Sino-Foreign Economics College transitioning to for-profit status has boosted market expectations for vocational education policies, leading to a small rebound. However, this rebound may not be sustained, mainly due to the lack of clear policy incentives and selling pressure from trapped positions exerting downward pressure on any rebound attempts. The education sector, especially vocational education, has sound performance support and long-term government policy backing. When will the undervalued cabbage prices in the sector see a turning point? With performance growth being maintained, opportunities on the right side may be brewing. Looking back at the evolution of the education industry over the past five years, the market has oversold the policy sensitivity, with limitations on the capitalization of basic education and deep regulatory measures on extracurricular tutoring significantly impacting the education sector. From 2020 to 2024, the entire education sector in Hong Kong dropped by nearly 70%, with 2025 seeing a tapering of negative factors and a return to market warmth. However, the education sector's rise this year has been only 9%, far below the overall market rise. In terms of trends, the market will focus on education at the high school level and above, primarily due to declining birth rates and the domestication push leading to a contraction of the preschool phase, affecting elementary school enrollments. Furthermore, with the peak in the number of births in 2016 followed by a continuous decline, the peak enrollments for junior high school and high school are estimated to be in 2029 and 2032, respectively, indicating a six-year development cycle for high school education. Additionally, vocational education has a ten-year cycle of growth, with continued policy support. It is worth noting that in recent years, rapid developments in AI have made AI + education the mainstream application track. Currently, AI technology is mainly used in teaching, lesson planning, testing, and student learning, strengthening in-school education while providing more opportunities for extracurricular training. The emergence of Deepseek this year, with its open-source Deepseek-R1 tailored to the education sector, has attracted industry leaders like Gaotu, Xueda, and Youdao, heralding a new opportunity for accelerated AI education implementation in China. Looking at policy and demographic trends, extracurricular training at the high school level and beyond, especially vocational skills training, will become the core application entry point for AI. With AI's enhanced productivity, ushering in an era of lifelong education for working-age populations. The prospects are particularly promising for vocational education, with a long period of peak student enrollments and expanding market space under the influence of AI. More importantly, the performance of vocational education stocks listed in Hong Kong reflects the weak impact of bearish policies, with most posting double-digit revenue growth over the past three years, including achieving growth in the 2025 fiscal year. However, valuations have fallen in line with basic education and extracurricular training. As of now, vocational education stocks generally have P/B ratios below 0.5 times and P/E ratios below 5 times. In reality, the vocational education sector continues to struggle. On one hand, the "market hotspots" have absorbed the majority of market funds, leading to a lack of capital in some sectors and liquidity issues. On the other hand, unclear policy signals have eroded market confidence. However, after stabilizing in the past two years, the sector is currently in the stage of brewing opportunities for a weak rebound. Confirmation of a valuation turning point is still needed, focusing on undervalued, high dividend, and performance-driven stocks. The vocational education sector has a strong bottoming out foundation for three main reasons: First, in recent years, some industry players have shifted towards strategies of not expanding or acquiring, with some beginning to seek expansion routes. Second, steady revenue growth and generally high dividend yields provide strong support for low valuations. Third, the IPO attractiveness of Hong Kong stocks is spreading to other sectors, benefiting stocks with good performance, low valuation, and high dividends. Observations from Futu show that most vocational stocks still choose to distribute dividends annually, with TTM dividend yields averaging above 5%, with some exceeding 10%, such as Edvantage Group (00382) at 11.48%, New Higher Edu (02001) at 16.8%, and SCVE Group (06913) at 10.5%. From a TTM P/E valuation perspective, Edvantage Group, New Higher Edu, and SCVE Group are at only 2.5 times, 2.82 times, and 4.3 times, respectively. Therefore, the plethora of "cabbage prices" in the sector present a buying opportunity. With limited downside risk and significant upside potential, the answer is certainly yes. In the US stock market, historical cases from the "fintech" sector can be found, such as Chinese concept stocks in the fintech sector. Due to the negative impact of the lending policy in 2019, valuations plummeted by up to 90% from 2019 to 2022, presenting widespread undervalued opportunities in 2022, similar to the current situation in the Hong Kong vocational education sector. With P/B ratios generally below 0.5 and P/E (TTM) below 5, along with performance support, the fintech sector began rebounding around 2022 and doubled in value in less than three years, with some stocks even experiencing tenfold increases. While the Hong Kong and US markets are different, they share common value investment characteristics, different paths leading to the same destination. Sector rotation funds and cyclical funds may soon activate the vocational education sector. Moreover, private vocational education is highly recognized, with most stocks showing steady growth in student enrollments, performance income, and profits. During the 2022-2025 academic years, most stocks, such as China Edu Group, China Chunlai, and China Kepei, have seen growth in student enrollments and strong performance, maintaining double-digit compound growth in revenue. China Chunlai, in particular, has shown strong profitability, with a net profit margin of 47.82% in the first half of the 2025 fiscal year, far exceeding industry averages. Furthermore, vocational education stocks have attracted investor attention through capital market support. For instance, earlier this year, New Higher Edu saw continuous increases in executive holdings, while Edvantage Group uses equity incentives to align talent with company development. Chen Lin Edu and other stocks have repurchased shares to enhance shareholder returns. Zhongjiao announced that it is optimizing its undergraduate education platform, adjusting vocational education sectors, strengthening project execution discipline, and expanding financial strength and financing channels. As a sector leader, Zhongjiao's income growth leads the pack, but rapid expansion in recent years has led to an accumulation of significant goodwill values, resulting in a substantial impact on profitability due to goodwill impairment over the past two years. For example, the total impairment loss for the 2024 fiscal year was 1.911 billion yuan, causing a 69.7% drop in net profit. However, after a one-time significant impairment provision, the expected impact of goodwill on future performance is gradually diminishing, with profits expected to recover in the 2025 fiscal year. In conclusion, despite the dual nature of the capital market, the vocational education sector continues to be overlooked by funds. However, with emotions brewing under performance support, valuation bottoms are becoming more solid. With continuous performance growth and the diffusion of market funds, it is likely to attract value investors' attention. Focus on undervalued, high dividend, and strong performance stocks.