Chinese tutoring names TAL Education, Gaotu Techedu, New Oriental sink on fears of tougher regulations

  • Chinese tutoring TAL Education, New Oriental and Gaotu Education fell as least partly after an analyst said that delayed policy announcement doesn’t reduce sector risks.
  • Investors appear to have expected that the Chinese government would finalize K12 tutoring policy by mid July, according to Credit Suisse analyst Alex Xie. Some small cities appear to have banned tutoring in the summer holiday this year.
  • A “delay of press release doesn’t indicate lower risks than before,” Xie wrote in a note. “We also see risks to further restrict the profitability of tutoring in the K9 stage, as we study the regulatory development in K9 private schools.”
  • Xie expects that the central government has likely already given the policy direction with local governments “while some details are pending.”
  • Separately, a Daiwa analyst published a note earlier on Chinese education stocks, writing that the Guangzhou education body plans “tough rules” for the after-school tutoring industry, citing a post from Southcn.com on July 14. One of the regulations discussed included a ban on after-tutoring activities for weekends, public holidays and summer/winter breaks for grades 1-9.

  • The Daiwa analyst wrote that if the measures are adopted by the entire country, there’s likely further downside to TAL and EDU.
  • TAL Education fell 9.6%, while New Oriental dropped 5.8% and Gaotu Techedu, formerly knowns as GSX, declined 11%.
  • Gaotu Techedu short interest is 24% of float.
  • The Chinese tutoring stocks has been recovering in the last week after reports that a Chinese ban on summer tutoring was limited to K-9, rather than K-12, as some had expected.
  • Chinese tutoring stocks had plunged in recent months, prompting several downgrades, on fears that the government could institute a ban on after school tutoring on weekends and holidays. In late May, Chinese President Xi Jinping stressed the need for regulations for both online and offline after-school training institutions.
  • The fall in the tutoring stocks also comes as rhetoric between the U.S. and China has heated up in recent weeks and today the U.S. warned companies on risks of doing business in Hong Kong. Yesterday, noted short seller Carson Block of Muddy Waters said he expects many Chinese ADRs to be delisted.
  • Last month, Credit Suisse’s Xie downgraded TAL Education and New Oriental, citing increased regulatory risk.

Author: Josh Fineman, Seeking Alpha