(Bloomberg) -- A selloff in Chinese private education companies deepened on Monday after Beijing announced a sweeping overhaul that threatens to up-end the $100 billion sector and jeopardize billions of dollars in foreign investment.
New Oriental Education & Technology Group Inc. plunged as much as 40%, extending Friday’s record 41% fall and after its U.S. traded shares dropped 54%. It warned in a Monday stock exchange filing that the regulations will have a material adverse impact on the company. Koolearn Technology Holding Ltd. tumbled as much as 35%, the biggest drag on the Hang Seng Tech Index, which fell 4% to its lowest since September 2020. China Maple Leaf Educational Systems Ltd. dropped 16%.
Chinese regulators on Saturday published reforms that will fundamentally alter the business model of private firms teaching the school curriculum, as Beijing aims to overhaul a sector it says has been “hijacked by capital.” The new regulations ban firms that teach school curriculums from making profits, raising capital or going public. Friday was already a bloodbath for the sector in both Hong Kong and the U.S., after a document on curbing tutoring firms from going public circulated on social media.
The “worst-case became a reality,” JPMorgan Chase & Co. (NYSE:JPM) analysts including DS Kim wrote in a note dated Saturday, saying it was uncertain whether the companies could remain listed under the new regime. “It’s unclear what level of restructuring the companies should undergo with a new regime and, in our view, this makes these stocks virtually un-investable.”
Worst Case Emerging for China Tutors After Overhaul: Street Wrap
Elsewhere the Hang Seng China Enterprises Index slumped as much as 3.2%. The gauge was poised for its lowest since October, as investors continue to price in the risks of China’s crackdowns on industries from tech to real estate and education firms.
Companies that teach school subjects can no longer accept overseas investment, which could include capital from the offshore registered entities of Chinese firms, according to a notice released by the State Council. Those now in violation of that rule must take steps to rectify the situation, the country’s most powerful administrative authority said, without elaborating.
In addition, listed firms will no longer be allowed to raise capital via stock markets to invest in businesses that teach classroom subjects. Outright acquisitions are forbidden. All vacation and weekend tutoring related to the school syllabus is now off-limits.
“Curriculum tutoring firms should remodel their businesses or even switch to a different industry as soon as possible,” said Jiang Ya, an analyst with Citic Securities Ltd. “These measures are just the beginning and there is potentially an abundance of follow-up policies and continued tight regulation.”
Education technology had emerged as one of the hottest investment plays in China in recent years, attracting billions from the likes of Tiger Global Management, Temasek Holdings Pte and SoftBank Group Corp.
New Oriental and TAL Education Group (NYSE:TAL) may incur losses that exceed downside-case scenarios if both tutoring companies halve student fees to meet Beijing’s guidelines, said Bloomberg Intelligence analyst Catherine Lim in a note.
There are more than 20 education companies that are listed in Hong Kong with a combined market cap of HK$187 billion ($24 billion) after Friday’s drop. Short selling volume of the biggest education firm, New Oriental Education, surged by more than 8,000% on Friday, data compiled by Bloomberg shows.
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