New Oriental Shareholders Flee, China Restricts Tutoring Companies

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Jul. 27 2021, Published 12:14 p.m. ET

In December 2018, New Oriental Education & Tech Group (NYSE:EDU) was the place to be. Over the next two years, EDU shares would climb as much as 240 percent. But by early 2021, the outlook for this tutoring and education company was much different.

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What happened to New Oriental to cause such serious stock value damage? Is a rebound a surmountable feat?

The context behind New Oriental's massive downfall

Yu Minhong, founder and chairman of New Oriental Education & Technology Group
Source: Getty

The downfall of EDU stock is an almost Shakespearean tragedy. Literature aside, the reality of this once-bellowing tutoring company is grim.

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Here's a bit of background. The Chinese government has put a stop to the ever-growing private education sector. The government said that companies are taking advantage of students and families who want to succeed in increasingly competitive schooling.

Specifically, regulations now say that companies that teach core school subjects can't earn a profit, go public via an IPO, or raise money from international (non-Chinese) investors. This is a big blow to the industry, which has swelled to be worth $100 billion since 70 percent of K-12 school kids in China's cities became enrolled in tutoring programs.

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This led to a true flee from stocks in the industry, and it's hard to say what will come of already publicly listed companies. Regulators might enforce the new rules retroactively, which would practically eliminate the market as it exists currently.

How New Oriental stock has been impacted

Over the last five days, EDU stock is down nearly 70 percent. This has brought a once-burgeoning market cap down to $3.47 billion, which is teetering on the small-cap side of the spectrum.

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The shares are down nearly 90 percent since February when fears of sweeping Chinese regulations on the general tech sector started.

As of July 27, New Oriental stock is worth just $2.00 per share. The shares haven't been that low in almost a decade and it's a major blow to the NYSE-traded company.

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EDU stock isn't the only casualty following tutoring sector regulation

New Oriental is one victim in a populated pool. Other companies in the tutoring and after-school education industry are also seeing historic declines.

Gaotu Techedu (NYSE:GOTU) has also fallen this week, having lost nearly 75 percent of its value in the last five days. Gaotu founder Larry Chen took an especially painful shot when he went from being one of the world's richest people to losing $15 billion in equity since the beginning of the year.

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There's also TAL Education Group (NYSE:TAL), which has lost about 76 percent of its value in the last five days.

Is the rebound for EDU and others a promising peek into the future?

The rebound for EDU stock on July 27 isn't a promising peek into the future. New Oriental's 2.11 percent rise is minuscule compared to its recent losses. The same goes for other, equally afflicted stocks in the Chinese education sector.

It's hard to say what will come of the increasingly strict antitrust agenda in China, but one thing is for certain. Chinese education stocks aren't the move of the day for risk-aware investors in any geographic region.

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