Chinese Education Stocks Are Plunging Again: What You Need To Know

After the crackdown on big Chinese tech firms, the country's regulators now have their aim on education companies. Weighed down by the headline risk, stocks belonging to this sector are steeply lower for a second straight session.

What Happened: Directives issued by the powerful State Council and the Chinese Communist Party General Office made public last week mandate that all education companies teaching school curriculum should register as non-profit organizations.

Among the other clampdown measures are subjecting existing online tutoring firms to additional scrutiny and prohibiting these companies from offering after-school tutoring for core subjects during weekends, public holidays and school vacations. The new rules also preclude curriculum-based institutions from publicly listing their shares and engaging in other capital market activities. Foreign investments and investments by listed companies would be forbidden.

These new measures are likely to severely hurt the prospects for listed Chinese education companies.

Related Link: How FAANGs Could Benefit From Chinese Regulatory Scrutiny Of Domestic Tech Stocks

Stocks Swoon On The New Regulations: U.S. and Hong Kong-listed Chinese education stocks came under significant selling pressure on Friday and the weakness has spilled over into Monday's session.

TAL Education Group TAL shares shed over 70% on Friday and is on track for more losses in Monday's session. Reacting to the new regulations, the company said it will comply with the regulations and it's carefully considering the provisions of the regulations and assessing their implications for its business.

"The Company expects the Opinion, related rules and regulations, and the compliance measures to be taken by the Company will have material adverse impact on its after-school tutoring services related to academic subjects in China's compulsory education system, which in turn may adversely affect the Company's results of operations and prospect," TAL said in a statement.

In the wake of the development, Goldman Sachs lowered the price target for TAL from $53 to $5.60.

New Oriental Education & Technology Group Inc. EDU also put out a statement echoing a similar sentiment.

What's Next: Listed Chinese education companies will likely wind up their after-school tutoring assets by the end of the year, Nikkei reported, citing Jefferies analyst John Chou. The analyst believes TAL and New Oriental Education can expand unregulated operations.

The affected companies may begin to focus on non-academic subjects and vocational subjects, Nikkei said.

The new rules are being imposed amid China's concerns over falling birth rates and the impact on economic growth. Beijing is thinking up measures to reduce the burden of child-raising in a bid to boost birth rates.

At last check:

• TAL was down 26.25% at $4.43
• New Orient Education was losing 25.60% to $2.18.
• Youdao, Inc. DAO shares were declining 21.59% to $9.95.
• Gaotu Techedu Inc. GOTU, which was previously called GSX Techedu was down 25% at $2.64.
• 17 Education & Technology Group Inc. YQ was losing 18.44% to $1.15.
• Zhangmen Education Inc. ZME shares were receding 28.96% at $4.39.
• Hailiang Education Group Inc. HLG was seen moving down 3.09% at $35.41.
• China Online Education Group (COE) shares were slipping 18.95% at $3.08.
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