China Tutoring Regulation Quick-Take
China’s after-school tutoring (AST) companies have been hit with what appears to be yet another set of regulations. The industry has come under pressure as China seeks to reduce the cost of having kids to stem the country’s declining birth rates.
Regulators have already prohibited tutoring on weekends and holidays, but a new, unverified document now in circulation outlines a forthcoming regulation requiring these tutoring companies to register as non-profits. Going forward, after school tutoring will instead be run by public schools, a move which should make access to additional education more equitable.
While the news is very serious for companies in the tutoring space and will materially impact these stocks, we think the broader China internet sector sell-off is an overreaction.
Asian investors, aware of the ban, sent tutoring stocks lower but the broader internet space in Hong Kong was only moderately impacted. US-listed stocks are telling a completely different story, selling off en masse despite these regulations only targeting a small subset of the space.
We believe this disparity is a result of US investors incorrectly creating a single narrative around China regulation headlines that have little bearing on companies in the space. Numerous Chinese companies have adhered and adapted to regulations without their financials being affected. Moreover, indicators such as the value of CNH (China’s off-shore currency) and strong quarterly earnings of Chinese internet companies further reinforce the domestic consumption opportunity created by China’s growing middle class as it occurs online.
We will be monitoring the situation closely. Stay tuned to China Last Night for more updates.