How China’s New Regulations Impact Chinese Education Stocks

How China’s New Regulations Impact Chinese Education Stocks
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Many Chinese stocks in the education sector, especially for those in the field of K9 (the compulsory education in China doesn’t include high school), have seen their profitability, market performance, and attractiveness for capital declined this year due to the tightening policy.

Chinese stocks have experienced various degrees of decline during the first half of this year due mainly to the influence of HFCA Act; however, the education industry in China has been subject to the most stringent regulation and restrictions, which has caused high volatility in the market. Compared with the beginning of the year 2021, the total market value of the Chinese education stocks has evaporated by more than $100 billion already.

Ever since New Oriental (NYSE: EDU) listed on the United Sates in 2006, the road of raising capital for China’s education industry became lucrative. The off-campus tutorial industry for K9 had experienced overheated financing and massive expansion in the past few years. In the last year, the online education industry rose as the market seized another opportunity during the pandemic time.

Although the overall valuation for China’s education industry soared, a series of problems within the market gradually emerged. Nevertheless, many offline tutorial institutions were hit during the pandemic due to the shortage of cash flow. Some of them are still facing such problem even today since they are unable to reinstate their offline classes. The fierce advertising campaign and market expansion derailed the essence of education and confused many parents who want to purchase tutorial programs for their children.

The closure of many small and medium traditional tutorial institutions that were unable to sustain their operations has also brought huge losses to those parents. The marketing campaigns of these institutions are good at fearmongering, urging parents to buy the products so that their children will be able to catch up with the competition. At the moment when the Chinese government is actively promoting the three-child policy, the excess expansion of those education industries will undoubtedly add financial burdens to parents and ultimately alter their fertility intention.

Xinhua News Agency, the official Chinese state media, commented that the unregulated capital expansion was driven by the utilitarianism of education and the pursuit of short-term high profitability, which has created group anxiety on parents; as the result, only the capital itself, rather than students and their parents, will ultimately benefit, and the involution of education industry will inevitably occur.

Such comment somehow reflects the government’s resolution to strengthen the regulation of the education market. “Opinions on Further Easing the Burden of Students’ Homework and Off-Campus Tutorial Programs in Compulsory Education” (“Double Easiness” in short) was passed during the meeting of Central Comprehensively Deepening Reforms Commission in May 2021. Since the specific details of the policy were not announced at that time, many speculations arose in the market.

On May 24, 2021, a rumor went viral on Chinese social media sites: a series of provisions of “Double Easiness” was disclosed, including off-campus tutorial institutions shall not offer courses during holidays, tutorial institutions whose major business is academic education or quality education shall not be allowed to go public, and tutorial institutions shall not advertise themselves.

Although this rumor was not confirmed back then, it caused quite a stir in the market as many Chinese education stocks fell by 10% to 30% on that day, which means that the uncertainty of the new education policy increased the risk of holding those stocks.

On June 15, the Ministry of Education officially announced the establishment of a new department for supervising the off-campus tutorial institutions. One day later, the Ministry of Education issued a warning message regarding the risks of false propaganda related to the off-campus tutorial institutions. After the detailed information of “Double Easiness” was revealed on July 24, 2021, the pervious rumor was officially confirmed.

The policy also emphasizes that all existing academic tutorial institutions must be registered as non-profit institutions, and the capitalization events are strictly prohibited.

Many Chinese education stocks plummeted in response to the announcement. TAL Education Group (NYSE: TAL) fell by 70.7%, New Oriental (NYSE: EDU) fell by 54.2%, and Gaotu (NYSE: GOTU) fell by 63.3%, indicating their largest single-day drop in the history. Currently, non-academic tutorial institutions and pre-school education institutions have not been affected by the new policy.

More than 120 tutorial institutions, led by The China Association for Non-Government Education, jointly announced that they fully understood the new policy and will uphold the government’s decision. Such policy has generated a huge impact on the listed tutorial institutions, which means that these institutions may either choose to delist or spin off their academic tutorial facilities from their assets. Jianzhi Education Group just filled the SEC Form F-1 on July 23, 2021.

Although this company’s main business is higher education and will not be affected by the “Double Easiness”, the panic in the market has been formed already, which will definitely affect the company’s listing process.

Erli Wang

Research Analyst

 

 

 

 

 

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