In the last week, Chinese stocks slumped until the dip due to a challenging future. China has aggressively attacked technology companies in recent days, and the fear sparked between institutional investors. EdTechs are between the companies damaged by the rude Chinese policy. But, why?
Last week, a rumor mushroomed in the stock market: People’s China Republic (PCR) was planning a change in the regularization for EdTech, constraining them to become non-profit organizations. In consequence, Chinese EdTech companies would not be able to invest in or acquire education firms, according to Bloomberg.
Nothing is written, yet
TAL Education Group (TAL.N) and New Oriental Education & Education Group (9901.HK) were two big losers in this savage bear market that wiped off $ 1.5 trillion in market value in Hong Kong. After the strepitous fell, both companies published a similar press release that said:
“…certain English and Chinese language media outlets reported that the PRC regulators are considering a new set of regulations concerning after-school tutoring services related to school subjects taught in China’s compulsory education system. The regulations have not been published, and the Company has not received official notification of the regulations. It’s the Company’s policy not to comment on market speculations.”
Chinese authorities: the bad news is real
However, on July 24 the news updates were not good. China’s official state media, such as Xinhua News Agency and China Central Television, confirmed the fears. General Office of the CPC Central Committee and the General Office of the State Council published high-level policy directives about requirements and restrictions related to after-school tutoring services, which affects directly the business model of Chinese EdTechs listed in Hong Kong and NASDAQ.
Some of the main restrictions are that listed companies can’t raise capital to invest in a business that teaches academic subjects. Also, they are prohibited from providing tutoring subjects during holidays, and they must follow fee standards established by Chinese authorities.
In resume, Chinese authorities screw up the business model of Chinese EdTechs. Institutional investors ran away from the sinking ship. The angst was drawn in these graphs:
Will EdTechs Change their business models?
Analysts expect that the largest education providers in China take steps to mitigate the impact on their business model, according to Reuters.
Tutoring companies likely have to dispose of K-9 academic tutoring businesses,
Don Lau, China Renaissance Securities analyst
Chief Investment Officer at UBS Global Wealth Management Mark Haefele pointed out the implementation of previous regulations has “often not taken the strictest form”. In a report, Morningstar Equity Research said that “both New Oriental and TAL would need to adjust their K-12 academic businesses and likely spin-off the non-profit mandatory education businesses in the longer term – while keeping high schools and other business such as overseas test preparation, adult English, and general English.”
Analysts expect that Chinese tutoring firms invest in non-academic tutorings such as art, computer coding, sport, music, and other extracurricular programs to keep their companies remain listed.
Retail investors preyed on stocks in the dip
Not everybody was afraid of new policies in the Chinese education industry, which sub-index plunged as much as 15% from Thursday’s close. Retail investors started to buy in the dip, as informed in Business Insider. However, they preferred higher-profile stocks, such as e-commerce firm Alibaba and electric vehicles maker NIO.
In the case of Chinese tutoring companies, there’s still a lot of uncertainty about the future. Chinese state media is trying to calm down foreign investors. According to The Strait Times, the Securities Daily reported cited fund managers assuring that the slump has “to an extent, reflected the misreading of policies and venting of sentiment by some funds”.
The current landscape is desolate. Most companies lost 90% of their market value. Their executives face the challenge of calm down investors and convince them in their capacity to overcome new restrictions with innovation and creativity. It’s too soon to know if retail investors will get a big gain in their buys in the dip.
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