(CapitalWatch, Jan. 10, New York) A year ago, New Oriental Education & Technology Group Inc. (NYSE: EDU; HKEX: 9901) was a sure winner among U.S.-listed Chinese stocks. In the nation where the child's education was traditionally seen as the family's stepladder to a higher social status, the schooling industry seemed infallible – until 2021. Over the past half-year, Beijing has wiped out the $100-billion afterschool tutoring market with cutthroat new rules, forced schools to close, and slashed the previously fast-growing tutoring providers' valuations.
Today, at $1.77 per share, EDU stock is worth just a fraction, down 90% overall. Previously, New Oriental was one of the most stably rising Chinese stocks in New York – and was so from late 2015 until the second quarter of 2021, with few drawbacks. Over the past five years, its value had tripled – before President Xi Jinping cracked down on the nation's top private businesses, education providers included.
Specifically, Beijing released a set of laws which it said were aimed at reducing the burden of homework and afterschool studies on students and parents. The measures targeted for-profit afterschool tutoring services on academic subjects in China's compulsory education system from kindergarten to ninth grade.
These have been the main revenue drivers for companies like New Oriental and its rival TAL Education Group (NYSE: TAL), another former favorite among U.S.-China stocks. In a November press release, New Oriental said K-9 academic tutoring services accounted for approximately 50% to 60% of its total revenues over the past two years. In the same statement, the company said will cease offering these services at all its learning centers by the end of 2021.
In recent news, New Oriental's founder and chairman, Minhong Yu, disclosed in a social media post over the weekend that the company has laid off 60,000 workers in 2021. Yu also said the company's revenue fell 80% after it stopped offering K-9 tutoring according to the new law. Further, Yu said adherence to the new policies cost New Oriental nearly $3.1 billion as the company had to refund tuition, terminate leases, and pay compensation, among other losses.
Looking at New Oriental's financial reports, the company last released its financials in September 2021 for the fiscal year ended May 2021. The company generated $4.3 billion in revenue for the 12 months through May, a 19% year-over-year increase, on net income of $230 million.
In a filing with the U.S. SEC on Monday, New Oriental warned
investors that various media publications spurred by Yu's personal post were
not authorized by the company and should not be relied upon for making investment
decisions. The company also said it is preparing its financial results for the
six months through November and anticipates releasing them between late
January and mid-February.
But the warning did too little. EDU stock dropped 5% on Monday in New York. In Hong Kong, shares in New Oriental inched 1% higher to HK$14.40 per share.
Now, New Oriental has shifted focus to other educational services and is exploring new business opportunities, according to company statements. The services of focus include "test preparation courses, language training courses for adults and educational materials."
Yu also wrote in his post that New Oriental's business remains "in a state of uncertainty," while the company will seek a new focus for growth in 2022.
The company is also delving into sectors entirely separate from education. Specifically, New Oriental has launched a livestreaming platform in late December, as reported by the Global Times. So far, "Dongfangzhenxuan" held several livestreaming sessions: in the first, Yu discussed New Oriental's upcoming plans; in the second, the company sold 5 million yuan worth of agricultural products, as Pandaily reported. The medium also cited visitors of the stream joking "watching his live commerce is like attending classes" for Yu's way of talking about the products in the streaming session.
Reportedly, New Oriental has launched businesses in the sectors of software technology, human resources, sports industry, and others.
Beijing's ending of the tough schooling culture concurs with the initiative on increasing the birth rate in the country. At the same time, China took measures to ensure that the students' time freed from excessive studies is used wisely and away from the internet. On Jan. 1, the Family Education Promotion Law was enacted, outlining the parents' responsibilities in providing education at home and fulfilling their community role. As the Global Times wrote, parents will face "criticism and education and exhortations and sermons in regard to situations when they refuse to fulfill their responsibilities toward family education."
In addition, regular schools were instructed to arrange for study breaks and exercise, resulting in a shortage of PE teachers, according to a recent report by The Guardian. Meanwhile, alternative schools sprang up, offering anything but compulsory subjects and aimed to draw out a student's achievements and increase happy time.
No doubt, investors will see some "happy school" China IPOs in the near future – regulations allowing, of course. As to New Oriental, the company has a way to go before it recovers to its pre-crackdown value. Yet as its experienced leader takes the former tutoring giant into various business directions, not all seems lost for this stock.