Chinese afterschool tutoring industry given the regulatory cane
The Chinese government has just released a number of new regulations for its USD $100 billion after school tutoring industry (AST). The new regulations effectively eliminate most of the sector and materially impair the current capital deployed in these industries.
The policy changes: (1) require AST companies to re-register as not-for-profit entities; (2) ban AST companies from being listed or seeking equity financing; (3) ban foreign ownership of AST companies; (4) severely restrict advertising in the industry; and (5) limit the amount of time allowed for students to study at AST institutions.
While new regulation was anticipated, the measures taken are far more extreme than expected. These dictates are essentially a complete shut-down of the for-profit afterschool tutoring industry with no compensation for existing businesses or stakeholders. The dramatic share price declines, first on rumour and then on the actual release of the new regulations, demonstrate the unexpected and dramatic impact of the Chinese regulatory changes. As an example, New Oriental Education & Technology Inc, (which the Polen Global Growth Fund has never owned) has seen its share price decline by 89 per cent in the past six months from HK$159 to the current HK$17.
There are certainly reasons to believe that the regulatory actions in the for-profit education sector might not be extended to other sectors in China. However, the demonstration of willingness to make such dramatic regulatory changes does raise this risk in Polen Capital’s view. There has been a deserved material increase in the risk premium associated with private capital in China. It seems there is now significantly more risk in any area of the Chinese economy that might be considered “sensitive,” with areas like property services, healthcare, and large cap internet being potential examples.
Fortunately, the Polen Capital Global Growth Fund has had NO exposure to the afterschool tutoring industry. However, mention should be made of the poor share price performance over the past six months of both Alibaba (down 37 per cent from US$309 to US$195) and Tencent (also down 37 per cent from HKD775 to HKD484), which on a combined basis currently have a five per cent weighting in The Fund. The team at Polen Capital team still however view Alibaba as arguably one of the most dominant businesses in the world. They also believe the company is also playing an integral role in China’s ambitions to reorient its economy from one that is export-driven to one that is domestically consumption-driven.
Please note share prices mentioned in this article are from 29 July 2021.
The Polen Capital Global Growth Fund owns shares in Alibaba and Tencent. This article was prepared 29 July 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade any of these companies you should seek financial advice.