JP Morgan, one of the world’s largest investment banks, has said that a regulatory crackdown on China-based for-profit education companies could render the sector “un-investable”.

Last week, reports that Chinese authorities are set to impose stricter-than-anticipated rules designed to rein in the country’s booming online and offline tutoring sectors sent shockwaves through the industry, triggering a slide in share prices of providers listed in New York and Hong Kong. Price falls – in some instances as high as nearly 50% – saw around $16 billion wiped from the collective market capitalisations of top-tier tutoring companies, such as TAL, New Oriental and Koolearn.

In light of the sector slide, JP Morgan analysts said the proposed rules – if implemented in full – could be detrimental to China’s after-school tutoring segment, which historically had been the fastest-growing part of its education ecosystem.

“While details of measures remain debatable, the document, if true, will effectively make the sector un-investable in our view,” JP Morgan analysts wrote in a note published Saturday. “We think it’s best to avoid the sector until clarity emerges.”

However, the analysts pointed out that there could be loopholes in the rules and suggested stocks could rally once clarification is provided.  

Still, they view the tightening of regulations as a push by the government to reduce the size of the tutoring market in the long run.

“As such, we’d probably use the rebound – even if it happens – to cut (remaining) positions.” they said.

TAL, the largest publicly listed tutoring provider in China, is down 91% year-to-date, trading at $5.96 compared to a February high of $90.15.

Date published: 28 July 2021

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