Chinese government is cracking down on the country’s booming off-campus tutoring industry

Jul 26, 2021 Education

 

On July 23, some of the industry's biggest names, including New Oriental Education & Technology Group, TAL Education Group, Gaotu Techedu and Koolearn Technology Holding tumbled after the news that China is considering asking companies that offer tutoring on the school curriculum to go non-profit came out.

The transfer triggered an enormous fall within the Hong Kong and New York-listed shares of Chinese language non-public schooling firms, and the selloff continued on Monday with a few of the inventory plummeting between 30% and 40%.

The K12 online education industry is facing a big change.

 

The shares of Chinese language non-public schooling firms all fall

On July 23, education stocks took a heavy hit. Education companies, including New Oriental Education & Technology Group, TAL Education Group, Gaotu Techedu and Koolearn Technology Holding etc., saw their share prices plunge.

According to incomplete statistics, the total value of the education stock market evaporated more than $19.1 billion, equivalent to 124 billion yuan.

Among them, TAL Education Group plunged 70%, from $20.52 to $6 per share, evaporating $9.365 billion, equivalent to 60.6 billion yuan.

Gaotu Techedu plunged 63%, from $9.58 to $3.52 per share, evaporating $1.55 billion, or 10 billion yuan.

New Oriental Education & Technology Group plunged 54% on July 23, from $6.40 to $2.93 per share, evaporating $5.947 billion in market value, or 38.5 billion yuan.

The document "Opinions on Further Reducing the Burden of Homework and Off-Campus Training for Students in Compulsory Education" (referred to as the "double reduction policy") circulating on the Internet mentions that the section on off-campus training should be strictly regulated and the behavior of off-campus training should be comprehensively regulated.

The document points out that we must adhere to strict approval of institutions, standardize training services, and strengthen the normal operation of supervision.

Among them, discipline training institutions are not allowed to go public to raise funds, capitalization is strictly prohibited; listed companies are not allowed to invest in discipline training institutions through stock market financing; foreign investors are not allowed to hold or participate in discipline training institutions through mergers and acquisitions, entrusted operations, franchise chains, the use of variable interest entities, etc.

The document also mentions that it strictly controls the excessive influx of capital into training institutions, resolutely prohibits unfair competition in the form of fictitious original prices, false discounts, false propaganda and other ways to promote business, and resolutely investigates and deals with industry monopolies in accordance with the law.

In addition, "photo search" and other methods are also considered to be inert students thinking skills, affect the independent thinking of students, against the laws of education and teaching bad learning methods.

These rules mean that the financing channels for educational institutions will be further narrowed, and the living space of online education companies will be severely compressed, and the development of online education institutions that rely on strong cash flow may not be sustainable in the future.

Online education, which was still raising massive amounts of money a year ago, will no longer be able to run wildly.

 

The news is not an empty wind

Education is a matter of national importance, and with the influx of capital, the online education industry is becoming more and more disruptive with false propaganda and excessive marketing, gradually departing from the essence of education.

Since 2021, the issue of advertising compliance in the online education industry has been brought to the forefront, followed by the industry experiencing successive rounds of "double reduction and tightening" and "teacher qualification issues" from regulators.

As early as the two sessions in March this year, the state has already put the "double reduction" on the agenda.

In April this year, the Beijing government issued warnings and imposed administrative penalties of 500,000 yuan for false advertising and price fraud on four out-of-school training companies for price violations, including New Oriental Education & Technology Group, TAL Education Group, Gaotu Techedu and Koolearn Technology Holding.

As policies related to the education industry continue to tighten, the share prices of many listed companies are diving, and online education "quasi-unicorns" such as Huohua Siwwei, VIPKID, and Zuoyebang have slowed down their IPO process.

In order to save themselves, the industry has even ushered in a "layoff wave", with news of layoffs from a number of head institutions. The online education "summer war" that was so hot in previous years has no presence this year.

Hillhouse Capital and other investment institutions in the year have reduced their holdings.

The data shows that Hillhouse Capital has reduced its holdings in education stocks this year. In the second quarter of 2021, it continued to reduce its holdings in TAL Education Group, and after reducing its holdings by 276.23 million shares in the last quarter, it reduced its holdings by 3,959.7 million shares again in this quarter, reducing its positions by more than 53% twice.

In addition to Hillhouse Capital, another investment institution Greenwoods Asset Management Limited also reduced its stake in TAL Education Group significantly in the quarter, cutting its stake in TAL Education Group by 856,800 shares in the first quarter, accounting for 77.61% of its position.

UBS Group reduced its holdings in the first quarter of this year in Gaotu Techedu and TAL Education Group, with the reduction for Gaotu Techedu being the first in seven quarters.

The shrinkage of online education has shown signs, and the cash-burning game of capital has finally come to a halt.

 

Where is the way out of the industry?

Faced with the great uncertainty in the industry, education-related companies have started to find alternative ways out.

On May 27, Gaotu Techedu announced that it would stop enrolling students in early childhood education and adjusted its organizational structure. The company also added new business scope such as "human resource services".

VIPKID has also tried to find a second growth curve beyond its "1-to-1" North American tutors, tightening its business and reducing its scale.

With the K12 education in the doldrums, the adult education is considered to be the next growth point. With the regulatory sledgehammer raised, the giants are considering the next step of transformation.

With the policy dividend and the social demand for vocational talents, the vocational track has emerged and become the cake that major players are fighting for.

This month, Kaikeba announced the completion of 600 million yuan of Series B1 financing to increase the yardage of adult education. Since April this year, the firm has expanded its test training business, including graduate school, public exams and qualifications, and has achieved certain results.

According to the 2020-2021 Vocational Education Development Report released by iiMedia Research, the market size of China's vocational skills education reached 141.5 billion yuan, up 7.4% year-on-year. In terms of investment and financing, the total investment and financing scale of China's adult education market reached 2.338 billion yuan in 2020.

Gaotu Techedu launched a new app to lay out its vocational education business covering language training, college exams, finance and economics, public exams, teaching, study abroad, management, medical and other types.

In addition to Gaotu Techedu, online education companies such as TAL Education Group and NetEase Youdao are also targeting adult education.

Since this year, the development of vocational education is developing quickly, can the transformation of vocational education become a new opportunity for K12 education institutions to save themselves?

This is an article from WeChat official accounts Lieyunwang (ID:ilieyun) , written by Han Wenjing, translated by Chris.