The story of New Oriental

A company was founded in 1993 by Yu Minhong (Michael Yu), an English teacher at Peking University in China, called "New Oriental" for offering TOEFL preparation courses to students.

It is now the largest private education company in China - It has grown to 1507 physical learning centers, 118 schools, 48,000 teachers, 12 own bookstores, and access to a network of 131 third-party distributors in 104 cities in China (where their own books + licensed books and educational material is sold), and is listed on NYSE (stock ticker EDU) and Hong Kong Stock Exchange (stock ticker 9901.SEHK). It was the first Chinese educational institution to list on NYSE in 2006.

It delivers online courses through 3 of its platforms:

1. Koolearn - a comprehensive online education services platform;?
2. DFUB - a live interactive K-12 tutoring service tailored to students in lower-tier cities (where it follows a dual-teacher model: broadcast courses delivered by well-known teachers from top-tier cities and have local assistant lecturers monitor and provide in-person guidance to students onsite); and
3. Donut, an online live English classroom courses for preschoolers

Its product categories are:

1. K-12 after-school tutoring (AST);?
2. Test preparation;
3. Language training for adults;?
4. Pre-school, primary and secondary schools;?
5. Education materials and distribution;?
6. Online education;?
7. Other services like educational tours.

Things were going well for New Oriental with net revenues, income, and the number of centers and schools increasing:

Something happened which brought down its market cap from $26 bn to $3.9 bn right now, in a few months after falling 90%. At the current market cap, P/E is 9, P/B is 0.79, and P/Sales is 0.97 -? cheap by any standards if you see the brand, margins, and the growth y-o-y.

And New Oriental was not alone. This happened with other education companies from China listed on US stock exchanges like TAL, 17 Education, and Gaotu Techedu.

So, What happened?

There were media reports in July 2021 that the PRC (People’s Republic of China) regulators were considering a new set of regulations concerning after-school tutoring service related to school subjects taught in China's compulsory education system.?

This spooked investors. They had seen what China had done to Alibaba and its IPO of Ant Financial.

The drafted regulations called “Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education” (the "Opinion") contained high-level policy directives about requirements and restrictions related to after-school tutoring services, including?

1. Institutions providing after-school tutoring (AST) services on academic subjects in China's compulsory education system, or Academic AST Institutions, need to be registered as non-profit,?
2. No approval will be granted to new Academic AST Institutions, and an approval mechanism will be adopted for online Academic AST Institutions;?
3. Foreign ownership in Academic AST Institutions is prohibited, including through contractual arrangements, and companies with existing foreign ownership need to rectify the situation;?
4. Listed companies are prohibited from raising capital to invest in businesses that teach academic subjects in compulsory education;?
5. Academic AST Institutions are prohibited from providing tutoring services on academic subjects in compulsory education during public holidays, weekends and school breaks; and?
6. Academic AST Institutions must follow the fee standards to be established by relevant authorities. The Opinion also provides that institutions providing after-school tutoring services on academic subjects in high schools (which do not fall within China's compulsory education system) shall take into consideration the Opinion when conducting activities.?

Now, Academic AST gives a disproportionate chunk of revenues for these companies. The bloodbath which followed is summarized in this image:

Many geopolitical commentators opine that this achieves many objectives of the Chinese government.?

There is increasing scrutiny of Chinese firms listed on US stock markets, and the majority of funds invested in these companies are of US institutions and retail investors. With the increasing risk of delisting of Chinese companies, if they do not follow new US regulations, China is itself scuppering its own companies. If the delistings ever happen, it will be able to show to its domestic audience that the US did not do it, in fact, China was instrumental in it as it first cracked down on these companies listed in the US - projecting its strength in front of the Chinese populace. And since the majority of funds invested are not from China, there will be no domestic hue and cry.

More than $1 trillion of investor wealth has been wiped out (mostly US wealth) because of the Chinese regulators crackdowns this year, starting with the Alibaba fiasco and the disappearance of its founder, Jack Ma, from the public domain for months. This loss of wealth has been called a big blow to the US by many analysts in the continuing tussle between the US and China.

Secondly, cracking the whip on after-school tutoring appeals to the domestic populace and builds the narrative that the government is worried about the pressure being faced by students and parents because of the competitive exams like Zhongkao (High school entrance exam), and Gaokao (College entrance exam).

This story has not ended yet, and we will see how this plays out. But it is super interesting!

What do you think are the reasons behind this? What do you think will happen next? Please comment and let me know.

Sources: Annual Reports, Factsheets of New Oriental, and various news articles.