China Bans Off-campus Online Tutoring; Education Stocks Take a Hit

The sector that prospered under Covid-19 last year is now in shambles after Beijing tightens the rules further.
Sep. 08, 2021 19:32
China Bans Off-campus Online Tutoring; Education Stocks Take a Hit

(CapitalWatch, Sept. 8., New York) Markets were in the red across the board on Wednesday, and Chinese education companies tumbled even lower on the news that China intends to put an end to online private tutoring altogether. The Ministry of Education is toughening up on irregular tutoring activities, ensuring the new rules are not circumvented.

Core school subjects cannot be provided in summer camps, in unregistered venues, in disguise as household services, and other off-campus places – including the internet. Indeed, livestreaming and online sessions are now also banned under the new regulations.

E-learning provider Gaotu Techedu (NYSE: GOTU), formerly known as GSX Techedu, was the biggest loser intraday Wednesday, its shares dropping 12% to $2.88 apiece. Private education giants New Oriental Education & Technology Group Inc. (NYSE: EDU; HKEX: 9901) and TAL Education Group (NYSE: TAL) both slid nearly 6%, to $2.27 and $5.35 a share, respectively.

Smaller Chinese tutoring provider Puxin Ltd. (NYSE: NEW) was down 8%, at 63 cents – the company has been non-compliant with the minimum bid listing requirements and announced last month that it had received a warning from the stock exchange. Another exam prep and tutoring company, OneSmart International Education Group Ltd. (NYSE: ONE), which tumbled 7% to 44 cents a share, is also under threat of delisting.

China Online Education Group (NYSE: COE), a.k.a. 51Talk, traded 5% lower intraday, at $3.13 per share. The majority of the company's tutors for Chinese students are based in the Philippines as 51Talk has built its business on employing native English-language speakers for its one-on-one classes. The company has taken a hit especially when China banned foreign-based teachers. Thus, 51Talk's rival VIPKid, a Tencent-backed English-language tutoring provider, said in August that it would suspend the sales of online classes taught by overseas tutors. 51Talk gave an update in late July, saying in a press release that it would comply with the new regulations and work with the authorities, though it stopped short from saying it had halted selling its online classes.

Professional education providers also plunged. Tarena International Inc. (Nasdaq: TEDU), which is facing lawsuits for alleged fraud in its books, also traded 3% lower, at $1.48. Meten Holding Group Ltd. (Nasdaq: METX), an English language training provider, was trading 3% lower, at 38 cents a share. The day before, Meten had closed its follow-on public offering of 30-cent shares and 29-cent warrants, worth $60 million in total.

Sunlands Technology Group (NYSE: STG), a post-secondary and professional education provider, slid 4%. The company recently carried out a reverse stock split to regain the minimum price listing requirement. Wah Fu Education Group Ltd. (Nasdaq: WAFU), which provides adult online learning, slid 1% to $7.19.

Another edtech company, providing interactive learning, Skillful Craftsman Education Tech Ltd. (Nasdaq: EDTK) was down 3%, at $1.51 a share. Skillful Craftsman recently shook up its top management roles, replacing the chief financial and chief strategy officers.

Beijing has taken a series of drastic measures over the past few months, pretty much killing the wildly competitive private tutoring market. The policies included ending the fundraisings in the sector and the entry of new providers, banning excessive pay to teachers, and separating academic and non-academic tutoring.

Earlier this week, the country's top economic planner said the authorities will begin to regulate pricing for off-campus tutoring in curriculum subjects in compulsory education. Previously, companies offering K-9 academic tutoring were required to restructure as non-profit organizations; now, local governments will set the "reasonable" fee standards.

The sweeping new measures will no doubt be reflected in the companies' performance of the third quarter, and will possibly be traced in the period of the three months through June as well.

As of today, only a few Chinese education companies have released their second-quarter results, among the first was Youdao – which saw its stock surge on strong Q2 performance. Youdao Inc. (NYSE: DAO) was down 3%, at $14.56 a share, intraday Wednesday. New Oriental and TAL Education had both canceled their scheduled earnings releases "in light of the recent regulatory developments."