The Chinese tutoring industry after school given the regulatory cane
The Chinese government has just released a series of new regulations for its US $ 100 billion after the school tutoring industry (AST). The new regulations effectively eliminate most of the sector and materially deteriorate the current capital deployed in these industries.
Policy changes: (1) require AST firms to re-register as nonprofits; (2) prohibit AST companies from trading or seeking equity financing; (3) prohibit foreign ownership of AST enterprises; (4) severely restrict advertising to the industry; and (5) limit the amount of time students can study at AST institutions.
Although new regulation was envisaged, the measures taken are much more extreme than expected. These dictates are essentially a complete closure of the after-school tutoring industry for no profit for any existing companies or stakeholders. The drastic falls in stock prices, first by rumor and then by the actual launch of the new regulations, demonstrate the unexpected and dramatic impact of Chinese regulatory changes. As an example, New Oriental Education & Technology Inc, (which has the Polen Global Growth Fund) May property) has seen its share price decline by 89% in the last six months, from HK $ 159 to HK $ 17 today.
Undoubtedly, there is reason to believe that regulatory actions in the for-profit education sector may not extend to other sectors in China. However, the demonstration of his willingness to make such dramatic regulatory changes increases this risk in the opinion of Polen Capital. There has been a well-deserved significant increase in the risk premium associated with private equity in China. It appears that there is now a significantly greater risk in any area of the Chinese economy that could be considered “sensitive,” with possible examples areas such as property services, health, and capitalized Internet.
Fortunately, the Polen Capital Global Growth Fund has had no exposure to the after-school tutoring industry. However, it is worth mentioning the poor performance of stock prices over the last six months, both for Alibaba (37% less, from US $ 309 to US $ 195) and for Tencent (also 37% lower than HKD775 to HKD484), which as a whole currently have a weighting of five percent in the Fund. However, the Polen Capital team still considers Alibaba to be one of the most dominant companies in the world. They also believe the company is also playing an integral role in China’s ambitions to reorient its economy from an export-oriented economy to one based on domestic consumption.
Please note that the stock prices mentioned in this article are from July 29, 2021.
The Polen Capital Global Growth Fund has shares in Alibaba and Tencent. This article was prepared on July 29, 2021 with the information we have today and our vision may change. It does not constitute formal advice or professional advice on investments. If you want to change any of these companies, you should seek financial advice.