Emerging Market Stock Pick Tear Sheets (July 16-Aug 13, 2023)

Education stocks Afya, Arco Platform, Vitru, Vasta Platform, Cogna Educação, ADvTECH, Curro Holdings, Stadio Holdings, YDUQS, CIRA Education, etc + China/HK, India, Korea & South Africa stock picks.

Aug 13, 2023

This post is a compilation of links and briefs for our short EM Stock Pick Tear Sheets (separate section) for the last few weeks which focused on Education stock picks (based in Brazil, Egypt & South Africa) plus various potential China/Hong Kong stock picks from CMBI China, India stock picks from moneycontrol, South Africa stock picks from Business Day TV, and South Korea stock picks from Mirae Asset Securities.

Education stocks are interesting stock picks because (in many ways) they could be considered subscription businesses - just like Netflix, Software as a Service (SaaS), or for that matter, a Substack newsletter. However, this Harvard Business Review article offers a clarification:

3 Reasons Subscription Services Fail (Harvard Business Review)

Many businesses call themselves subscriptions but aren’t exactly. Amazon’s “Subscribe & Save” makes for great alliteration, but shipping a predetermined item on a fixed schedule is a delivery service, not a subscription. Similarly, financing, leases, rentals, and monthly fees give customers access to a predictable good — a car, a home, or a tuxedo — so they’re not subscriptions either.
Fundamentally, a successful subscription business’s economic value is a function of the strength of the habits they create. Over the past decade, I’ve studied the fundamental attributes of habit-forming products to identify how companies hook consumers. I identified four steps successful companies build into their customer experience — what I call the “hooked model”:

Perhaps a good example of the “hooked model” in education would be careers in certain professions (like health care) that require life long learning (often for licensing reasons). This is something Afya provides as a leading medical education and digital health services group in Brazil. According to their website, they empower students and physicians to:

“…transform their ambitions into rewarding lifelong experiences from the moment they join us as medical students through their medical residency preparation, graduation program, continuing medical education activities and offering digital products to help doctors enhance their healthcare services through their whole career…”

In other words, recurring revenue generated throughout a healthcare professional’s career…

Likewise, most of the revenues for Brazil based Vasta Platform Limited and Arco Platform Limited are subscription based. For example: Arco provides subscription based learning systems that are cheaper for parents than textbooks as they cut out all the traditional middlemen and royalties that otherwise need to be paid. And parents are said to be rarely delinquent with their payments for more than a few days as their children cannot re-enrol should they fail to pay.

In other words, education in emerging markets is a business that can be considered almost inflation proof. Most parents will cut back on eating out, entertainment (Netflix…), and taking holidays before taking their children out of private schools and enrolling them in underfunded or failing public schools (where English may not be taught or the language of instruction). And in places like South Africa, those thinking of immigrating (especially to countries like Australia where there are points tests…) need to have reputable professional qualifications on paper.

However, education is not a fool proof business if poorly executed. For example: South Africa has three major listed education stocks (ADvTECH, Curro Holdings and Stadio Holdings) with varying business models (e.g. from “asset light” distance learning to traditional brick and mortar offerings or a mix of offerings) that will appeal to different types of investors (e.g. from the “widows and orphans” crowd to those seeking the higher rewards that come with more risk).

One of these stocks took on too much debt and over expanded just before COVID hit. During the COVID lockdowns, some parents had no income, but the company needed every classroom seat filled to keep up with debt payments and capital requirements for expansion. Fortunately, they have apparently learned their lesson and are now turning things around by focusing on maximizing their existing assets rather than rapid expansion.

Our Business Day TV Daily Stock Picks (July 2023) post once again pointed out how South Africa is facing “state collapse” e.g. the state-owned power provider cannot even keep the electricity on. However, brick and mortar education providers would only be using electricity during certain times of the day and most would already have installed gensets or solar - meaning little disruption to their operations.

It also appears the long mismanaged Unisa university system is about to be put under administration. Private sector education providers are well positioned to benefit from this move as more students exit the system and seek private sector alternatives.

I should point out that Section 29 of the South African Constitution enshrines and protects the role of the country’s independent schools and the ability of students to learn in the language of their choosing (English, Afrikaans, etc.).  Hopefully, this means no future government interference in the sector (Note: Brazil also has a favorable regulatory environment protecting private education).

In sharp contrast and as some of our recent fund posts have noted, education and curriculum are sensitive topics for China and Xi. Investors who paid close attention to what people in the sector were telling them on the ground knew to avoid investing in Chinese education ventures or stocks (although there appears to be numerous Chinese education stocks trading on US exchanges and some have repositioned themselves or have radically altered their business models…)

In China’s defence and without veering too deeply into American politics, Peter Schweizer’s excellent book (Secret Empires: How Our Politicians Hide Corruption and Enrich Their Families and Friends) has two chapters (4:21:13 Chapter 9: Barack Obama's Best Friend and 5:01:03 Chapter 10: More Smashing and Grabbing) detailing the “smashing and grabbing” of America’s private online education sector (among other sectors like the coal industry) using regulatory hammers in order to benefit certain well connected political donors:

Peter Schweizer Secret Empires Audiobook - 4:21:13 Chapter 9: Barack Obama's Best Friend

As in China, education is a politically sensitive topic in the USA due to the political power of American teachers' unions on K-12 education and the fact that most private universities are either directly or indirectly dependent on funding from the government. This means little hope for innovation in the American education sector; and as with China, significant political risks for investors.

In sharp contrast, most emerging markets would have private education sectors largely free of government interference and hopefully of American style “smashing and grabbing.” They are free to innovate and come up with new technologies, learning systems, business models (e.g. asset light distance education) and the like - exactly what the Brazilian and South African education stocks in this compilation post have done.

In addition, all three South African education stocks in this post have expanded their footprint beyond the country as there are huge education opportunities in the rest of Africa while Brazil’s market remains underserved. According to a somewhat dated 2018 market research report by LEK Consulting, private education in Brazil accounted for less than 20% of the overall market, compared to 30% in other emerging markets such as India.

However, I think the above tuition fees are dated. When I worked in the Philippines over a decade ago, I heard how tuition at good private catholic schools might be in the 100,000+ peso or US$2k+ range - fairly affordable for middle class professionals and those with “good” family names who might easily be earning that much a month. A few years ago, I heard this figure had skyrocketed to US$5-6k and that even middle class professionals and those from families with “good names” (but not necessarily “moneyed” any more…) who would otherwise never consider immigrating, were seriously thinking of doing so or not having children…

Again, parents will do anything to see to it that their children get a good education (or learn English). And that means opportunities for education stocks and their investors.

Finally, are there any education stocks listed in other markets (and preferably not China…) that I may have missed in this post? If so, let me know with a comment.

EM Stock Pick Tear Sheets Region/Country TAGS

Stock Pick Compilation Posts, Africa, Argentina, Brazil, Chile, China, Colombia, Eastern Europe, Egypt, Guyana, Hong Kong, India, Indonesia, Japan, Latin America, Macau, Malaysia, Mexico, Middle East, Nigeria, Poland, Singapore, South Africa, Southeast Asia, South Korea, Taiwan, Turkey & United Arab Emirates (UAE)

EM Stock Pick Tear Sheets Sector TAGS

Stock Pick Compilation Posts, Alcohol Stocks, AI Stocks, Auto Stocks, Bank Stocks, Battery Stocks, Biotech Stocks, Casino Stocks, Consumer Stocks, Education Stocks, Financial Services Stocks, Fintech Stocks, Food & Beverage Stocks, Gaming Stocks, Health Care Stocks, Hospitality Stocks, Industrial Stocks, Insurance Stocks, Internet Stocks, Investment Holding Company Stocks, IT Services Stocks, Meme Stocks, Oil Stocks, Property Developer Stocks, Real Estate Stocks, REITs, Restaurant Stocks, Retail Stocks, Semiconductor Stocks, Tech Stocks & Telco Stocks

PAYWALLED

Mirae Asset Securities' Korean Stock Picks (June 2023) Partially $
- June Korean stock picks: Duksan Neolux, LX International, SK Innovation, SK Hynix, Lotte Data Communication, Samsung SDS, Hyundai AutoEver, SK Biopharmaceuticals, KakaoBank, SKC & HanAll Biopharma.
YDUQS Participações (BVMF: YDUQ3): Digital Learning Investments Pay Off as Growth Continues $
CIRA Education (EGX: CIRA): Record Revenues and Minimal Margin Contraction Amid High Inflation $
ADvTECH (JSE: ADH): Becoming a Pan-African Education Business $
Curro Holdings (JSE: COH / FRA: 24P): Performing Significantly Better After Expanding Too Quickly $
Stadio Holdings (JSE: SDO): An Asset Light Distance Learning Model Pays Off $
moneycontrol India Stock of the Day (June 2023) Partially $
- Includes: Page Industries, SJS Enterprises, Repco Home Finance, Bharat Electronics, Saregama, IDBI Bank, Paradeep Phosphates, Ami Organics, Heritage Foods, Indian Hotels Company, ZF Commercial Vehicle Control Systems India, JK Paper, Sagar Cement, NTPC Ltd, DCB Bank, Max Healthcare Institute, EaseMy Trip, Emami, & HG Infra Engineering Co
CMBI China and Hong Kong Equity Research (June 2023) Partially $
- Includes: Bosideng, Topsports, FIT Hon Teng, Q Technology, Intron Technology, China Gas Holdings, Atour Lifestyle, EC Healthcare, Li Auto, Great Wall Motor, Dalipal Holdings, CR Power, Cafe De Coral, WuXi Biologics, Sunny Optical, BOE Varitronix, NIO Inc, Trip.com, SANY International, CMGE Technology, Baidu, Greentown Service Group Co, Ke Holdings, EVA Precision Industrial Holdings, Bilibili & JOYY Inc

moneycontrol India Stock of the Day (July 2023) Partially $
- Includes: Senco Gold, CIE Automotive, Navneet Education, KIMS Hospitals, Dabur India, State Bank of India (SBI), PCBL, MapMyIndia (CE Info Systems), Nazara Technologies, Faze Three Ltd, Titan Company, Motherson Sumi Wiring India, Aptus Value Housing Finance India, Cochin Shipyard, Control Print, Sumitomo Chemicals India, 360 One Wealth, Transport Corporation of India & Jindal Steel & Power

Business Day TV Daily Stock Picks (July 2023) Partially $
- Includes: Quilter PLC, Super Group, FirstRand, Naspers/Prosus, Netcare Limited, Life Healthcare Group Holdings, Aspen Pharmacare Holdings Limited, Grindrod Limited, Hyprop Investments, Absa Group, Mondi, Super Group, Attacq, Sasol, Motus Holdings, Combined Motor Holdings (CMH), Zeda, NEPI Rockcastle, SA Government Bonds, Artificial Intelligence (AI), Pepkor, Kumba Iron Ore, City Lodge, Anglo American, Standard Bank, Richemont, AngloGold Ashanti, Anglo American PLC, Impala Platinum, Adcock Ingram Holdings Limited, DRD Gold, Hosken Consolidated Investments (HCI), Equites Property Fund, Kap Ltd, Thungela Resources, LIG Nex1 Co & Italtile

NON-PAYWALLED

(NOTE: Forward P/Es, dividend yields, and charts are from August 11, 2023):

Afya (NASDAQ: AFYA): Shares of Brazil's Leading Medical Education Group Struggle to Breakout

Thanks to steady acquisitions, Bertelsmann backed Afya (NASDAQ: AFYA) is a leading medical education and digital health services group in Brazil based on number of medical school seats - delivering an end-to-end physician-centric ecosystem.

Specifically, the Company delivers an end-to-end physician-centric ecosystem that serves and empowers students and physicians to transform their ambitions into rewarding lifelong experiences from the moment they join us as medical students through their medical residency preparation, graduation program, continuing medical education activities and offering digital products to help doctors enhance their healthcare services through their whole career.

Since late 2021, shares have struggled to breakout beyond the $16 a share level.

P/E (Google Finance): 19.01 / Forward P/E (Yahoo! Finance): 11.81
Dividend Yield (Google Finance): N/A / Forward Dividend & Yield (Yahoo! Finance): N/A

Arco Platform Limited (NASDAQ: ARCE): Minority Shareholder Are Wary of this Brazil Education Stock

Brazil based Arco Platform Limited (NASDAQ: ARCE) provides educational solutions that includes content, technology and services to over 5,400 schools - from kindergarten through high school.

Specifically, the Company's curriculum solutions provide educational content from basic to secondary education K-12 curriculum in printed and digital formats delivered through its platform. The Company's activities also comprise editing, publishing, advertising, and sale of educational content for private schools.

However, a potential offer to take the Company private at $11 a share has been increased to $13 a share just a few months ago. A group of shareholders said the first offer represented “a callous mistreatment of minority shareholders…”

P/E (Google Finance): 272.82 / Forward P/E (Yahoo! Finance): 151.52
Dividend Yield (Google Finance): N/A / Forward Dividend & Yield (Yahoo! Finance): N/A

Vitru Limited (NASDAQ: VTRU): Positive Momentum for Brazil's Leading Distance Learning Higher Education Provider

Vitru Limited (NASDAQ: VTRU) is one of Brazil’s largest higher education institutions focused on digital education. Shares plunged in April and this fall was said to have been “exacerbated” by the stock’s limited liquidity (Yahoo! Finance has the average volume at 14,622 shares - albeit it can be significantly lower on some trading days). However, President Lula da Silva has been vocal about expanding the country’s higher education financing fund which would benefit the sector. The Company is also largely done integrating a large acquisition.

Vitru released its quarterly earnings results on Thursday, August 10th.

P/E (Google Finance): 19.80 / Forward P/E (Yahoo! Finance): 17.76
Dividend Yield (Google Finance): N/A / Forward Dividend & Yield (Yahoo! Finance): N/A

Vasta Platform Limited (NASDAQ: VSTA): A Brazilian Subscription Based High Growth Education Company

Brazil based Vasta Platform Limited (NASDAQ: VSTA) is a high-growth education company providing end-to-end educational and digital solutions for private schools operating in the K-12 educational segment. Most of Vasta’s revenues are subscription based (and thus recurring) plus the Company will be offering its services to the public sector.

Vasta Educação is part of the Cogna Group or Cogna Educação (BVMF: COGN3 / OTCMKTS: COGNY), one of the most relevant educational organizations in the world.

Note that Vasta Platform Limited reported second quarter 2023 financial results for the period ended June 30, 2023, after the market closes on Wednesday, August 9, 2023.

P/E (Google Finance): N/A / Forward P/E (Yahoo! Finance): 11.27
Dividend Yield (Google Finance): N/A / Forward Dividend & Yield (Yahoo! Finance): N/A

Cogna Educação (BVMF: COGN3 / OTCQX: COGNY): One of the World's Largest Private Education Providers

Cogna Educação (BVMF: COGN3 / OTCQX: COGNY) is the largest private educational company in Brazil and one of the largest private educational organizations in the world. The Company is also the parent of Vasta Platform Limited (NASDAQ: VSTA) - a high-growth education company providing end-to-end educational and digital solutions for private schools operating in the K-12 educational segment.

Currently, Cogna has 844,000 on-campus and digital undergraduate students in its Kroton vertical, and 44,000 graduate students in its Platos vertical, served by 176 own Postsecondary Education units and 1,536 accredited Digital Education centers. In K-12 Education, the Saber vertical had 31,000 students distributed in 52 own schools/managed through contracts and 22,000 students distributed in 122 Red Balloon units, while the Vasta vertical had 1.5 million students served through approximately 4,200 partner schools using core and complementary content solutions.

P/E (Google Finance): N/A / Forward P/E (Yahoo! Finance): 2.00k
Dividend Yield (Google Finance): N/A / Forward Dividend & Yield (Yahoo! Finance): N/A

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