Chinese firm undervalued by 81%: one of the most impressive reboots

On the face of it, the story of the last four years is undoubtedly remarkable: a company that lost virtually all of its business overnight in 2021 due to the government's ban on commercial tutoring has built itself back from the ashes to over $3 billion in annual revenues, gross margins of over 54%, positive operating cash flow, and net cash on the balance sheet exceeding the sum of its entire market capitalization. This is, without irony, one of the most impressive corporate reboots in the edtech segment of the last decade.

Except that a second look complicates the story considerably. The same governmental power that in one document wiped out over 70% of the company's market value in July 2021 and wiped out the entire commercial K-9 tutoring sector in China still exists and can still change the rules. The firm operates through a VIE structure, effectively through contractual arrangements, not direct ownership of Chinese assets, a legal fiction that can cease at any time. The shares…