Guideline, sell-off give edtech jitters

Chinese private education companies, especially the listed ones, are quickly evolving future moves in response to Saturday's guideline that all institutions offering private tuitions to school students will henceforth be registered as nonprofit organizations, which caused a massive sell-off in related stocks on bourses in China and the United States.

In China's billion-dollar tutoring and online education (or edtech－educational technology) sector, companies typically offer a bouquet of extracurricular products and services. Some of them are even listed on the US bourses.

On Saturday, the general offices of the Communist Party of China Central Committee and the State Council, China's Cabinet, issued a guideline proposing wide-ranging reforms in the sector.

Edtech companies will no longer be allowed to raise capital through IPOs. Listed companies and overseas investors are barred from investing, or acquiring stakes, in education firms that teach school curricula.

Foreign firms are also banned from acquiring or holding shares in institutions engaged in tuitions related to school curricula using variable interest entities or VIEs.

Analysts said listed companies may face the risk of delisting or have to spin off school curricula-related businesses.

The guideline also noted that the main aim of the reform is to significantly reduce the excessive burden of homework and after-school tutoring on primary and middle school students.

Market insiders interpreted Saturday's guideline as a signal to further transform the edtech sector quickly.

Investors on Monday resorted to a massive sell-off in edtech stocks－a sign that markets expect tough times ahead for the sector. China's education industry subindex of the A-share market dropped 8 percent.

In terms of individual stocks, New Oriental Education& Technology Group Inc, Koolearn Technology Holding Ltd and China Beststudy Education Group all dropped between 30 percent and 40 percent on the Hong Kong stock exchange on Monday.

On the Chinese mainland, the benchmark Shanghai Composite Index declined 2.34 percent to 3467 points, the Shenzhen Composite fell 2.65 percent, and the startup board ChiNext Composite index closed 2.84 percent lower.

On Friday itself, sensing potential policy changes, investors began the Chinese edtech sell-off. TAL Education Group tanked almost 70 percent to $6.06 per share while Gaotu Techedu Inc dived 63 percent to $3.51 on the New York Stock Exchange.

In China, there has been widespread and growing perception that the private sector's role in the important education sector needs to be reined in, given rising stress levels among both parents and their school-going children.

This has been attributed to the pressures created by excessively tough and progressively expensive extracurricular learning programs, which, observers said, have also created unhealthy competition among both market entities and consumers.

An investor close to online education startup VIPKid, who sought anonymity, said the firm will likely broad-base its business by moving beyond school-level programs into English-language courses for adults.

VIPKid currently offers one-on-one online English courses to children aged 4 to 12 in China. Its tutors are based in the US.

"The new guideline is just the starting point. We expect that K-9(kindergarten to 9th grade) after-school tutoring will see a long period of supervision of both business development and raising capital," said Jiang Ya and Feng Chongguang, analysts from CITIC Securities, in a research note.

"Existing companies in the sector will have to transform themselves into businesses of quality education covering art, music, vocational education, and education technology."