Even after the US$5.8 billion rout that dealt a blow to some 15 companies from TAL Education to New Oriental Education and Technology Group, China's after-school tutoring stocks probably have further to drop.
Investment banks rushed to cut their recommendations and price targets on the tutoring sector at the weekend after Beijing unveiled tough new rules to overhaul an industry that is worth about US$100 billion.
China International Capital Corp (CICC) has lowered its share price estimates on TAL Education Group, New Oriental and Koolearn Technology Holding by at least 57 per cent, saying that some stocks are facing a further decline of at least 6 per cent.
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Citic Securities says the sector that targets children between kindergarten ages and nine will move into a protracted period of "correction", while Industrial Securities recommends avoiding all education-linked stocks, citing the possibility that the regulatory crackdown will spill over to other segments, such as career training and tutoring for older students.
"The tough regulations will have a significant impact on both revenue and profits for relevant companies," said Cao Xute, an analyst at Shengang Securities "The valuations will also be revised downward accordingly."
American depository receipts of TAL tumbled 71 per cent to US$6 in New York on Friday and New Oriental plummeted 54 per cent to US$2.93. CICC has set price targets of US$5.4 and US$3.1 for the two companies respectively.
Youdao, which provides online dictionary and translation services, shed 43 per cent to US$12.69, against CICC's share price estimate of US$11.8.
Chinese education stocks trading in Hong Kong continued to reel from the sell-off on Monday. New Oriental tumbled 35 per cent, extending a 41 per cent decline on Friday. Koolearn Technology, an online tutoring platform, sank 32 per cent after a 28 per cent plunge on Friday.
The policy risks have been mounting for some of China's fastest-growing industries this year, as a strong recovery from the pandemic allows Beijing more leeway to tighten its grip on the industries it deems to exert too much influence on the economy.
Expensive off-campus learning fees have added to the financial burdens of parents, and taking courses after school goes against the government's goal of reducing the homework burden on younger students, the Education Ministry said in a weekend statement explaining why policymakers had introduced the rules.
The sweeping regulations promulgated by the State Council, China's cabinet, will ban junior middle school students from taking weekend and holiday courses offered by tutoring institutions. After-school tutoring companies cannot seek to raise funds from the stock market, and overseas investors and assets linked to tutoring may even face removal from listed companies, according to the rules.
The current sell-off in the stocks may be excessive, as shares of TAL and New Oriental have already fallen below their fair values purely based on fundamentals, according to Morningstar.
"In the worst-case scenario we would expect further industry consolidation, with more players exiting the market, while private one-on-one tutoring will likely boom with parents hiring privately," said Jenny Tsai, an analyst at the US research firm.
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