What happened
Pity investors in Chinese education stocks.
After spending most of 2022 on life support, shares of Chinese private education companies New Oriental Education & Technology(NYSE: EDU), TAL Education(NYSE: TAL), and Gaotu Techedu(NYSE: GOTU) finally caught a second wind in December, when the Chinese government repealed its zero-COVID policy and began to reopen its economy. With just 60 hours or so to go before the calendar flips to 2023, however, China is pulling the rug out from under investors again -- and announcing new regulations on education companies.
New Oriental shares are down 5.5%, TAL is tumbling 7.2%, and Gaotu is leading the whole sector lower with a 10.2% loss as of 10:05 a.m. EST.
So what
As Bloomberg reported this morning, China's Education Ministry has announced it will limit the fees private education companies can charge for tutoring elementary and middle school students. They will also require that payments be run through state banks to ensure monitoring of what the companies are charging. The new rules also mandate that tutoring services not be offered after 8:30 at night (or 9 p.m. for online tutoring).
By themselves, these new rules aren't necessarily more drastic than the regulations China imposed on private education companies in 2021. Then again, those earlier regulations were pretty rough. Combined with a slowing economy and continued zero-COVID policies in China, they crashed the for-profit Chinese education stocks, vaporizing anywhere from 88% to 97% of their value in a matter of months.
What's driving these stocks down today, in contrast, is probably more a recognition among investors that just because China has decided it can no longer sustain its zero-COVID policy doesn't necessarily mean it will reverse course on all of the policies that cratered the for-profit education sector last year. Today's new wave of regulations is a reminder to investors that the Chinese government remains dead set on reining in and controlling these companies' growth.
Now what
Not everyone is worried. In a note covered on TheFly.com this morning, Australian investment bank Macquarie reiterated its "outperform" ratings on New Oriental and TAL, at least (remaining silent on Gaotu). According to the analyst, these companies are already in compliance with China's newest set of regulations on for-profit education -- hence, they should not suffer from their being codified.
That being said, even Macquarie worries that investors will shy away from Chinese education stocks in the face of the government's renewed attack. That's actually understandable.
According to estimates collated by S&P Global Market Intelligence, 2023 was the year Chinese education stocks were supposed to start returning to profitability, with Gaotu earning $0.06 per share and New Oriental earning $0.08. In the opinion of analysts, TAL is supposed to take a bit longer to begin earning profits again. But now, with China cracking down on educators across the board again, it could be that all of these companies' profits are once again at risk.
After enduring a miserable 2021 and a 2022 that wasn't much better, is it any wonder that China investors are gun-shy today?
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends New Oriental Education & Technology Group and TAL Education. The Motley Fool has a disclosure policy.
