Jul 24, 2021
On Friday, Chinese education stocks plummeted on media reports that suggested that China may ban weekend and holiday after-school tutoring (AST) classes and convert academic tutoring institutions into non-profit organizations.
These reports - which remain unconfirmed but have circulated in multiple Chinese media outlets, including Caixin - in our view represent a meaningful step up from the event pattern that has impacted the sector year-to-date.
As a result, we’re currently re-evaluating our position in EDU and any other stocks for which there might be “read-through” or second-order implications from these most recent developments.
For more background on the recent macro developments in the Chinese AST market, please see the prior research we published on the space.
But in short, the most recent reports that circulated across Chinese media outlets have suggested that China may ban both weekend and holiday after-school tutoring (AST) classes, convert academic tutoring institutions into non-profit organizations, and prevent AST institutions from targeting or even raising capital from international markets.
If true, we believe this set of regulatory actions would represent a true black swan or extreme left tail outcome. In fact, in our scenario analyses, this outcome would most closely map to our acute downside case, which we had assigned a <5% probability to.
But what complicates the current situation further is that the takeaway from these recent reports is not cut and dry. The suggested set of regulatory outcomes seem to be fundamentally at odds with several other observable data points from both official and unofficial sources that we’ve tracked over recent weeks, including:
All this said, there are also several factors that seem to suggest that on net, the most recent reports should be viewed as credible and assigned precedence, including:
We’re still finalizing our views, but on net, we do believe that the Caixin reports are more credible than not, and deserve precedence when considering the path forward.
While valuations are now indeed extremely cheap and there are multiple conflicting factors that complicate the outlook suggested by recent reports, at the end of the day we believe everything needs to be weighed probabilistically against the key touchstones of fundamentals and core thesis drivers.
We will revert shortly with more details on the implied valuations at today’s levels, thoughts on the merits and drawbacks of various positioning possibilities, and our decision on the path forward from here.
Be sure to stay tuned in the app to keep fully up to date.
Cash Management
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