US-listed education stocks in China plunge again as Beijing makes industry crackdown official

Beijing’s crackdown on education once again caught the attention of Wall Street on Monday, with more downgrades in US-listed stocks as analysts added up the damages.

On Friday, JP Morgan downgraded shares of New Oriental Education & Technology Group EDU,
TAL Education group TAL,
and Gaotu Techedu GOTU,
after media reports that the Chinese government is considering new regulations regarding after-school tutoring.

Those reports were confirmed over the weekend, in restrictions published by state media under the title “Advice on further easing the burden of homework and after-school tutoring for school-aged students.” New Oriental and Gaotu each fell another 12% on Monday, following Friday’s move that saw those companies fall 54% and 65% respectively. Shares of TAL Education fell another 13% on Monday, after falling 71% on Friday.

Read also: China-based education stocks fluctuated on concerns over new PRC regulations.

Beijing’s measures are aimed at curbing rising education costs that have discouraged families from expanding.

Fawne Jiang, an analyst at The Benchmark Company, said in a note to customers Monday that the new policy will have a “big impact on the AST [after-school tutoring ] industry and adversely affect the course of operations and the financial prospects of the participants in the sector.”

The analyst said investors are clearly “entering virgin territory with substantial moving parts” and limited visibility. Benchmark cut the sector to buy, in addition to shares of New Oriental Education and China Online Education COE,
another US-listed stock that fell 43% on Friday and fell 12% at the start of the week.

In a statement, New Oriental said it would “follow the spirit of the Opinion and comply with relevant rules and regulations when providing educational services,” with a similar statement from TAL and Gaotu.

A statement from yet another US-listed player, Youdao DAO,
a China-based intelligent learning group, said the rules would have “material impact” on its K-12 course activities, adding that it was looking for ways to try to comply. Shares of Youdao fell 26% on Monday after falling 42% on Friday.

Some analysts had seen the crackdown coming from even further afield. Citgroup downgraded TAL, Gaotu and Koolearn Technology Holding, 1797,
which has no US listing, to sell on June 11, but held a buy recommendation on Oriental (EDU) given exposure to non-K12 tutoring. The analysts cited a comment by then-Chinese President Xi Jinping who had said that “students should not rely on after-school tutoring (AST) for their studies” as a signal of tightening up in the future.

“The implications of the new regulations are not pretty at all,” a Citi team led by Thomas A Singlehurst said in a note to customers on Monday. “Looking specifically at the education names under our coverage in Europe and the US, we think the implications are quite limited as there is limited direct involvement in the Chinese education market.

“The broader question is whether this will have broader implications for other tech companies in China. It’s beyond our jurisdiction to judge, but with separate stories about music regulation, it’s starting to look like there are,” he said.

The news came as Beijing ordered tech conglomerate Tencent on Saturday undefined
to terminate exclusive contracts with music copyright holders — US-listed shares of Tencent Music TME,
fell 8% in New York on Monday.

Stable nerves as a requirement to invest in Chinese stocks is nothing new, given months of crackdown news dating back to at least October when regulators postponed the IPO of Ant Group, the operator of China’s popular Alipay mobile wallet. Moves since then have resulted in a record $2.8 billion fine for market leader Alibaba BABA,
amid criticism of founder Jack Ma’s business empire, who founded Ant Group.

Earlier this month, the Chinese government blocked new users from downloading apps from Didi Global Inc. DIDI,
the country’s response to Uber Technologies UBER,
That’s because US regulatory measures have also made some investors wary of holding Chinese stocks listed in New York.

Opinion: Here’s Your Final Warning: Chinese Stocks Listed in the US Are Dangerous to Hold

Investors may need to dig a little deeper when it comes to US-listed Chinese companies, Mike O’Rourke, chief market strategist at JonesTrading, said in a note to clients Monday. He said TAL’s Form 20-F Securities and Exchange Commission filings from the past 3 years listed draft rules on private education under the “Risks Related to Our Corporate Structure.”

The company cited potential challenges if those rules were to become law. “In the future, investors will be looking more closely at risk factors in SEC filings of US-listed Chinese companies,” O’Rourke said.