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What now after $Tal Education and other China Education Stocks fell 90%?

There will be a few times in investing where an investor feels are so concentrated on the investment angle that they can become rather blinded to the reality on the ground.

We can get so caught up in the numbers, and confirmation bias will reason with the sceptic in all of us to override the qualitative aspect of prospecting stocks.

Prospecting China after-school education stocks could very well be one of them.

Why did Tal Education, New Oriental Education and Gaotu Techedu and other Chinese Education stock’s share price collapse?

In the past one and a half years, we have seen the China government exact pressure on different aspects of the tech industry.

So it was no surprise that some other sectors would feel the heat as well.

Tal education group, New oriental education and GSX Techedu share prices went on a freefall as early as March this year.

News began filtering out that Chinese authorities are conducting snap inspections of after-school tutoring institutions. There were rumours that China may ban the use of online education for students below certain ages, and may also ban online education companies from advertising in Chinese state-owned media.

Since then the share price has been trending downwards with great volatility. It was not surprising to see the share prices move up and down by 8-15% a day.

On Friday, it was confirmed that China’s government is cracking down on the country’s off-campus tutoring industry:

  • Local authorities will ban the provision of holiday and weekend tutoring
  • Will no longer approve the establishment of new tuition centres
  • Companies that operate edtech platforms, or services that provide online education, will no longer be allowed to raise capital through IPO
  • Listed companies and overseas investors are barred from investing or acquiring stakes, in education firms that teach the school curriculum

This sounds super drastic and very anti-capitalistic to me.

Tal Education Group, listed in the US, plunged 70% in one day. New Oriental Education fell 40% and Gaotu Techedu fell 63%.

The fear and uncertainty affected a lot of Chinese stocks that are unrelated to the Chinese education sector on Friday night trading.

These online education companies have been on a good run prior to this.

To give some context here is how the three companies performed in the past 5 years:

Tal Education
Gaotu Techedu
New Oriental Education

Are there value in these stocks after a nearly 90% plunge from the top?

I think we have to look at this in the context of the fundamentals. This includes looking at the numbers, and also the qualitative aspects.

There is a lot of fear and uncertainty right now which affects the qualitative aspects. It really looks a bit fucked right now.

Actually, as an active individual stock investor, this scares me in a different way: I can see that if I am focused in the past 5 months, I can come up with an investment case to be investing in some of these companies.

This means I see the value, after soaking in the risks that surfaced and what I still don’t know.

And I would be catching a fucking knife.

It makes me question whether I have any competence at all.

How Challenging is China’s Education Situation?

Some of us have this bias to invest in investments where we can touch and feel the investments.

This allows us to have great conviction in our investments.

But there are investors who argue that in this time and age, you should be able to find information that gives you a pretty good idea about the fundamentals of a business.

As someone that grew up in Singapore’s education system, have friends working as teachers and tutors, I thought I know how bad or how challenging things are.

But the more I hear about the situation, I realize how myopic I can be if I am not so attentive to things.

This Douyin video would probably give you some idea about the recent plunge in share price from the Chinese perspective. How did it come to this?

The whole situation has become soooo competitive.

The education company have basically perfected the SAAS, aggressive marketing, star influencer model and developed a crazy economic moat.

The moat is that if you don’t do well in school, you are going to fall behind in life.

No one wants to fall behind in life.

Some of the marketing/messaging can be really fuck if you ask me:

Does your shopping cart contain your child’s future? If you do not enrol, we will be educating your child’s competitors.

I came across some Tweet threads that try to explain these things to us:

This one is pretty good.

I can see a little of Kyith here but to a lesser degree. By the time I graduated from university, I was severely lacking in the adulting department.

I was least attentive to a certain social impact of this.

If you have such a system, it means that it cost a lot to bring up a child, not to do extremely well, but one that can fend for himself or herself in the world out there.

My friend Caveman spend a large part of his working life in China and still maintains good contact with his former co-workers.

He confirms this is the general narrative of the peasants on the ground.

  • Good school teachers are being poached at very high salaries to become star tutors.
  • Parents are expected to learn and teach kids schoolwork after office hours.
  • Caveman has staff coming to him to help them solve maths questions so that they can teach their kids at night.
  • School teachers become sales for private tuition centres and ask parents of kids with poor test results to send their kids to designated private schools. Parents all know the teachers will get referral fees/kickbacks from the tuition centres.

The teachers are likely to suffer a huge decline in disposable income with this crackdown and this will be tough for those with large mortgages and financial commitments and used to the high life.

But apparently, the peasants are cheering.

Where I got myopic was that… if tuition is not an option but a necessity, then this becomes not a discretionary expense but an essential expense.

This becomes a deterrent to having children, which becomes a modern social issue.

The investment case will still be determined by your read on how this situation will pan out.

Lillian Li argues that in a country where things are very much determined on a top-down approach, we have to pay attention to the rules of the game.

And the rule of the game is what is in the Five Year Plan, which is the blueprint for the Chinese economy for the next five years and beyond.

How Similar is Singapore to This?

I think to a certain degree, Singaporeans would experience something like this but to a different degree.

Doing well in school is no longer a guarantee for you to move up the social ladder. You have to do well so that you can have a fighting chance.

I will reserve my comments and I think my peers such as Bully the Bear and Mr 15 Hour Work Week can better comment on the situation.

Personally, I think the situation in China may be extreme enough that the China government had to act else they have a freaking bigger problem.

But Singapore does have a population problem as well.

Would the cost of raising a child be a big determinant of whether married Singaporean couples have children?

Lillian’s comment on the property market lingered in my head. I wonder how that will play out as the property industry is an extremely large, important industry and a traditional drive of wealth for the Chinese.

I also wonder if that will have an impact on the Chinese property management companies as well.

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June

Friday 30th of July 2021

Thanks Kith. Always insightful and sobering. Love to read your blog

Kyith

Saturday 31st of July 2021

Hi June, I try my best

Sinkie

Monday 26th of July 2021

Lol, good example of political risk in investing.

Xi has accomplished in 1 day what the US is trying to do in 3 years --- stop people from investing in US-listed China shares.

Remembered a popular Asian fund had New Oriental in its Top 10 at the end of 2020 ... took a look again & it seemed no longer the case in the last few months. Might still have been a small 1% or 0.5% position though. But it's good that at least people investing professionally are aware of issues & taken action.

Re property, think it'll be more of the residential that will be affected (maybe follow SG use various cooling measures). Will also affect banks / finance companies that provided mortgages for the affected category of properties though. Beijing will just tell these companies to do NS & eat any losses.

Right now any China non-SOE company that is "too big for its shoes", or having >50% market share, or outright monopoly, or going against whatever is at the top of Xi's head currently (like demographics) had better tread carefully --- and investors (esp outside of China) will be avoiding them for now.

There can also be contradictions e.g. latest 5-year plan calls for low-carbon & green energy ... but many of the largest coal companies have gone up thru the roof in the last 6 months. And China has been importing millions of tons of coal from US in the past few months (after cutting off OZ). Probably coal companies may come under political pressure in the years ahead, especially if smog & pollution in Beijing causes big rises in respiratory illnesses & deaths.

These few weeks & months may be a good time to stock up on China A & H shares, if you have long time horizon and strong stomach. Or intend to flip if there's sharp counter-trend bounce or short squeeze.

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