Jianzhi Education Debuts Like Meme, But Then Gets Lesson in Gravity

Key Takeaways:

• Jianzhi Education’s big first-day jump, followed by gradual declines back to its IPO price, signal the recent parade of China meme stocks on Wall Street could be losing steam
• The IPO is unlikely to signal a major resumption of New York listings by Chinese firms despite a landmark agreement last week between the U.S. and Chinese securities regulators

By Doug Young

Mid-sized education materials provider Jianzhi Education Technology Group Co. Ltd. JZ deserves a gold star for endurance, following its U.S. IPO trading debut that caps nearly a yearlong effort. There are quite a few things to say about this debut, whose significance is largely symbolic for a number of reasons despite the company’s small size with a market cap of $333 million.

Jianzhi appeared to be the latest in a recent parade of China meme stocks that came flying out of the gate with massive first-day gains. At the same time, its trading debut last Friday came the same day as the announcement of a highly anticipated information-sharing agreement between the U.S. and Chinese securities regulators that could remove a delisting threat now hanging over all U.S.-traded Chinese stocks.

Last but not least, Jianzhi also comes from the embattled education sector, which was the subject of a major crackdown by Beijing last year during a year of numerous similar regulatory actions across a number of sectors in China.

We’ll address each of those points one-by-one shortly. But first we’ll start with the basics of this particular IPO. Jianzhi first filed for the listing in July last year with a relatively modest fundraising target of $50 million. That same month marked the start of a winter for Chinese IPOs in New York, following the disastrous listing of the Uber-like DiDi Global that rushed to market in defiance of a warning from China’s internet regulator.

Following its original prospectus filing, Jianzhi went on to file 13 updates before finally debuting its shares last Friday at $5, at the bottom of their $5 to $7 range. It ultimately raised about $25 million, or just half its original target.

That brings us to the first significant point, which is that Jianzhi joined a small group of similar-sized newly listed Chinese companies that have recently become investor play toys, or meme stocks, similar to what happened in the higher profile cases of game store operator GameStop GME and theater operator AMC AMC last year.

The shares opened at $126 in their trading debut last Friday – up from their IPO price by a factor of 25 – and soared as high as $186 that day, briefly valuing the company at more than $12 billion. It closed its first day at $18.75, still up nearly fourfold from its IPO price. But it’s moved steadily downward this week, and last closed at $5.50, or just a tad above its IPO price.

We previously wrote about other China meme stocks in this current wave, including financial service providers AMTD Digital HKD, Magic Empire Global MEGL and TOP Financial TOP, as well as another education company called Golden Sun GSUN and an online furniture seller called GigaCloud GCT.

AMTD Digital was the standout of that group, with its shares rising from their IPO price of $7.80 to as high as $2,555, briefly valuing it as high as much bigger companies like Facebook parent Meta FB. AMTD Digital’s stock has come down since then but at its latest close of $112.20 is still well above its IPO price. The others are all up, though by much less, from their IPO price. Thus, Jianzhi’s first-week performance appears to show this cycle is still around but fast losing steam.

IPO revival?

From the colorful meme story, we’ll turn our attention to the more serious story of the recent clash between the U.S. and Chinese securities regulators that threatened to kick the more 200 U.S.-listed Chinese stocks off Wall Street. The U.S. Securities and Exchange Commission (SEC) and China Securities Regulatory Commission (CSRC) took a major step toward averting that outcome with their announcement of a deal last week that will give the SEC’s accounting arm access to records held by auditors of U.S.-listed Chinese companies.

In its announcement of the deal, the SEC said it would work with the CSRC over the next few months with some test cases and give a progress report in December. In the latest development on that front, Reuters reported the SEC has selected three behemoths – ecommerce giants Alibaba BABA and JD.com JD, and Yum China YUMC, operator of KFC and Pizza Hut restaurants in China – as its first three test cases.

So, does Jianzhi’s successful IPO – one of only a handful by Chinese companies in New York since last July – mean the tap for such listings might start to pick up soon to its previous level? The answer is probably “no,” since this particular IPO was in the planning stages for more than a year, and obviously pre-dates the announcement of the agreement last week.

We’ll probably need to wait for the SEC’s December update before determining if and when the IPOs may return to more normal levels. If the SEC gives a positive assessment, the IPOs could resume almost immediately, as there are probably at least two or three dozen larger ones that were in the pipeline before the halt last year.

Finally, there’s the education issue, and whether Jianzhi’s listing signals a relaxation of last year’s massive crackdown that wiped out an entire industry of companies offering K-12 classes in core curriculum areas. Jianzhi managed to largely avoid that crackdown, since it sells content, mostly instructional videos, to universities and libraries that can then offer that content to college students and adults.

The adult education focus that Jianzhi is part of has become a hot new area for China education stocks, since Beijing is strongly promoting private sector participation in this less-sensitive area.

Accordingly, the company currently trades at a relatively high price-to-earnings (P/E) ratio of 43 based on its 2021 profit of 52.9 million yuan ($7.7 million). That figure comes down a bit to 26 if we use its higher profit from 2020, though both figures were probably affected by the pandemic. The latter figure is roughly in line with the P/E ratio of 22 for vocational educator China East Education (0667.HK), and a 25 for Readboy (2385.HK), a maker of educational devices.