OPTIMAS GLOAL ALPHA FUND - Optimas Capital Limited · Our fund performance was dragged by the short squeeze of Great Wall Motor. hina PI is likely to go up aggressively, coupled with

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OPTIMAS GLOBAL ALPHA FUND

Newsletter, October 2017

An Investment In Knowledge Pays The Best Interest

Chinese parents oftentimes are associated with “Tiger moms” and “Tiger dads”, for being strict on their

kids’ learning and education. Indeed, competition on education has always been not only between the chil-

dren, but also parents. After all, education resources are scarce and competition for those is intensifying in

recent years, evidenced by the soaring prices of school district housing (学区房) and the rise of private

education institutions.

Recently the below three screenshots went viral on Weibo and Wechat, and it shows Chinese parents’ ea-

gerness to squeeze out any edge, however little it is, for their kids’ education.

It is screenshot from one wechat group consists of parents from one Shanghai primary school class. Appar-

ently, the class is forming a parents’ committee and most of the parents want to participate as a standing

committee member. Very soon the parents are competing by posting cover letters and boosting their own

educational / social backgrounds, to show qualification. By the look of it, you would think they are com-

peting on a university board position, not a parent committee member for but one class of a primary

school.

Alas, when it comes to education, competition is indeed stiff – not only for the kids, but more for the par-

ents!

Picture 1: Parents competing intensely to be included in the parents’ committee of their children’s class

Fund AUM

$240 million

Portfolio Manager

Thomas Wong

Strategy

Pan Asia Equity Long

Short

Inception

August 2016

Liquidity

Quarterly

30 days notice

Minimum

$1 million

Management Fee

2%

Incentive Fee

20%

Administrator

Northern Trust

Auditor

Ernst & Young

Legal Counsel

Deacons (Hong Kong)

Campbells (Cayman)

Prime Brokers

Credit Suisse

Morgan Stanley

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This is why we have seen in recent years a spectacular rise of private education institutions, providing after school tutor-

ing and training for students.

Just how big is the market? By 2016, there is a K12 (Kindergarten through twelfth-grade) student population of 182mn

and the number is growing thanks to the relaxation of one-child policy. The total market size is estimated to be

Rmb497bn in 2016.

Chart 1: Government targets 191mn K 12 population by 2020.

Source: Ministry of Education

The market is tremendous but like so many other industries in China, it is also highly fragmented. The largest two play-

ers: TAL Education and New Oriental combined only takes 2.5% K12 market share in 2016.

But that is changing. Like many other industries in China, we are already seeing consolidation taking place. For example,

TAL in 2016 holds 1.5% market share in K12 market, that is a sharp rise from only 0.5% market share in 2012. The market

share gain is a result of strong brand equity, investment in teaching technology as well as excellent execution & results.

Nowadays, larger private education institutions can employ the help of technology, such as video conference, answering

machine, facial recognition, parents feedback application, big database, etc, to enhance the students’ learning experi-

ence. All these investments are proven to be successful in improving students’ study efficiency, but traditional mom-and

-pop tutoring shop can hardly afford the luxury of investing in such infrastructure.

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Picture 2: Students in TAL class are using answering machine to interact with teacher via a video conference

Picture 3: TAL’s application for parents (家长帮) creates an online parents’ community of >10mn

Picture 4: Results: TAL’s admission rate to Project 211 universities is markedly higher than national average

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Meanwhile, the Gaokao (Joint University Entrance Exam) reform also helps consolidation. In the past, it is more difficult for larger institu-

tions to expand across provinces due to differences in textbooks and Gaokao exam content. But under the Gaokao reform since ’14,

more provinces will be using the same national exam content, which could help the national expansion of larger institutions.

In 2016 alone, 8 provinces abandon their own Gaokao content and joint national Gaokao exam.

Picture 4: Anxious parents taking photos of their children walking out of Gaokao examination room

Conclusion:

The private K12 education industry has already grow into a behemoth of Rmb497bn market size. The number is only going north, thanks

to China’s anxious parents, who don’t want their children losing at starting line. Meanwhile, larger institutions, with all their financial

resources, are creating moat for new entries by heavy investment in education technology. Their excellent training results in turn pull

more high-quality students their way, creating a virtuous circle and helping them gain market share. The market share consolidation is

further solidified by the Gaokao reform, which levels differences in exam content across provinces.

Indeed, as Franklin Benjamin once said, an investment in knowledge pays the best interest. We believe this is true not only for parents,

for countries, but also for financial investors.

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OPTIMAS GLOBAL ALPHA FUND PERFORMANCE SUMMARY

The Optimas Global Alpha Fund estimated net return in October 2017 was 1.65%, bringing its year to date net return to 14.32%. The

fund performance was mainly driven by Ping An and Shenzhou long positions, which were up 14.3% and 8.8% in October. The fund also

benefit from the short position on Ctrip, which dropped by 9.2% during the month. Our fund performance was dragged by the short

squeeze of Great Wall Motor. China CPI is likely to go up aggressively, coupled with the rising 10 years bond rate, we turn more bullish

on consumer sector over commodity and property.

Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 YTD-2017 Oct-17

Monthly Return -0.48% -0.66% 1.01% 1.59% 2.90% 3.28% 0.59% 2.86% 0.82% 14.32% 1.65%

Return (YTD) 14.32%

Volatility (YTD) 4.12%

Maximum Drawdown (YTD) -1.14%

Sharpe Ratio (YTD) 3.26

Return (ITD) 11.47%

Sharpe Ratio (ITD) 1.70

Top 5 Long Position Top 5 Short Position

CNOOC NetEase

Nintendo China Unicom

Hengan BOC

Ping An Pegatron Corporation

Shenzhou International Dongfeng Motor Corporation

0%2%

54%

8%

8%

0%0%

18%

10%

Country BreakdownAustralia

China

Hong Kong

Korea

Taiwan

Thailand

Europe

US

Japan

26%

8%

7%

13%1%2%

37%

1%1%3%1%

Sector BreakdownConsumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Real Estate

Telecommunication Services

Utilities

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LEGAL NOTICE

This report is intended exclusively for the person to whom it was given by Optimas Capital Limited and does not constitute an offer to

sell or a solicitation to buy any securities or an offer of any investment advisory services. The statistics presented are based on estimates

and assumptions which may be materially incorrect. No representation is made as to their accuracy. Past performance is not indicative of

future results.

References to market or composite indices, benchmarks, or other measures of relative market performance (indices) over a specified

period of time are provided for the intended recipient’s information only and do not imply that a portfolio will achieve similar returns,

volatilities or other results.

This document is intended only for professional investors as defined under the relevant laws of Hong Kong and is not intended for the

public in Hong Kong. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. No action has

been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis and may not

be reproduced in any form or transmitted to any person other than the person to who it is addressed.

Thank you for your continued support and interest in our fund. Please contact us with any questions or to request additional

information at [email protected]

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OPTIMAS GLOAL ALPHA FUND - Optimas Capital Limited · Our fund performance was dragged by the short squeeze of Great Wall Motor. hina PI is likely to go up aggressively, coupled with