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A regulatory storm continues to roil China’s lucrative education sector as new reports suggest officials may be preparing to ban for-profit providers from going public, potentially blocking access to billions of dollars of capital, both domestically and overseas. EducationInvestor Global explores the ramifications for listed and privately owned education companies and their investors.

Caixin Global, a Beijing-based publication renowned for its investigative journalism, this week reported that China’s government is weighing a crackdown under which it would prevent private education companies from selling their shares on stock markets. The report cited comments provided by an anonymous government official in Beijing.

The report – if accurate and true – could signal an extension of a multifaceted regulatory clampdown targeted at large swathes of China’s booming for-profit education sector, whose growth has been accelerated significantly by tutoring providers, the largest of which – TAL and New Oriental – are quoted on the New York Stock Exchange.

In recent weeks, reports – some of which are based on official statements – have circulated detailing new regulations designed to rein in profit seeking within China’s compulsory education sector (Grades 1-9), as well as the country’s tutoring segment – both offline and online. Stringent curbs on M&A already in place in the private schooling and kindergarten segments are expected to be bolstered by new rules around the advertising of tuition services and off-campus education.

China says the new rules are intended to ease pressure on school children, who on average spend more than 12 hours a week on extra-curricular studies, while boosting the country’s hampered birth rate by lowering family living costs. China has one of the highest spends per capita on private education globally.

But a ban on initial public offerings by Chinese education companies would represent a drastic change to rules governing capital raising in an industry that is already regarded as tightly regulated and isolated from foreign investors.

The move would seal off a route to exit widely accessed by venture capital and buyout firms that pump billions of dollars annually into fledgling Chinese ed techs while throwing into disarray IPO plans already underway – and could hamper future private fundraises. IPOs in China, Hong Kong, the US and elsewhere would be at risk of being banned, it is understood.

“While the ramifications of this, on the whole, are unclear, without an IPO exit window, venture capital and private equity investment in private education will come to an almost-complete halt,” said Chris DeMarino, managing partner at Academus Partners, a consultancy that advises investors on matters related to China’s education market.

According to HolonIQ, a data provider, Chinese ed techs have raised nearly $27 billion of venture capital over the past decade. Nine of the world’s ed tech unicorns – with a market capitalisation of $1 billion or more – are Chinese.

Edward Slade, a corporate finance advisor to Asia-Pacific education companies and investors, said that, “if Caixin is correct, then this is a disaster for global and local [Chinese] VCs. It will have a long-term impact on the cost of capital and risks associated with China investment.” Slade was formerly a managing director at Hong Kong-based investment bank CLSA and a senior executive at Maple Leaf Education, a listed private school operator.

Mariana Kou, chief executive of Hong Kong-based Research Study Education Group and former award-winning equity analyst who covered Chinese education stocks at CLSA, said that investors are “very sensitive” to potential regulatory changes.

Kou also raised questions over the fate of China-based education providers already listed on bourses in the US, China and Hong Kong.

“If true,” said Kou in reference to Caixin Global’s report, “we still don’t know what would happen to those already listed”, pointing to the prospect of forced de-listings by regulators.

Kou added that the change in rules could “hit unlisted operators very hard because fundraising and cash-burning marketing activities may stop”, echoing comments by DeMarino and Slade about the negative impact on early-stage and mid-market fundraising activities.

Anip Sharma, partner at L.E.K. Consulting’s global education practice, said that while “there is no official word yet and additional regulations are expected in June, if Beijing moves to ban private tutoring companies from listing, it would be another clear sign from the government that they want compulsory education to stay within the school premises – physically and in practice”.

Asked whether Chinese regulators could ban offshore IPOs and takeovers by special purpose acquisition companies (SPACs), Wall Street’s hottest investment vehicle, Sharma responded: “They can do whatever they want.”

Just days before the news of a potential ban on flotations of Chinese education providers broke, Shenzhen-based online tutoring company Zhangmen filed for an IPO on the NYSE. Earlier in May, it was reported that Tencent-backed VIPKid is planning to also go public in the US to raise at least $500 million.

Meanwhile, Yuanfudao, one of China’s most valuable private ed techs, which is also part-owned by Tencent, has reportedly put on ice plans to raise around $1 billion in response to regulatory upheaval. Earlier in May, Yuanfudao was one of several online tutoring companies to be fined by Chinese authorities over misleading marketing campaigns.

A ban on IPOs would deal a fresh blow to the share prices of listed China-based education providers, some of which this year have lost a fifth of their value or more as a result of mass sell-offs triggered by regulatory turbulence.

Fitch Ratings, one of the world’s biggest credit-rating agencies, this week acknowledged the “heightened regulatory risk in compulsory education” after downgrading its outlook on two listed Chinese school operators – Bright Scholar and Wisdom Education – to ‘negative’ from ‘stable’. Bright Scholar Education is down 30% year-to-date, and Wisdom Education International Holdings is down 37% over the same period.

Date published: 27 May 2021

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