China YuHua Faces Liquidity Challenges; Raising Uncertainty Rating to Extreme, FVE Cut to HKD 2.32

We raise our Morningstar Uncertainty Rating on China YuHua to Extreme from Very High following questions over its financial status. Trading in China YuHua’s shares have been suspended pending publication of annual results as the auditor was unable to ascertain whether YuHua has sufficient financial resources offshore to meet potential convertible bonds redemption obligations by Dec. 27, 2022. Channel checks with other China education companies indicate that situation is unique to China YuHua. Our weighted average cost of capital rises to 15% from 11.7% after factoring heightened credit and equity risk. We make minor tweaks to reflect the weak Chinese yuan and leave our core operating assumptions unchanged until more information is provided. The higher risk measures and unfavorable exchange rate lead to a cut in our fair value estimate to HKD 2.32 from HKD 3.06.