· Considering the sweeping reforms announced by the regulators for China’s edtech sector, any meaningful recovery in the share prices of edtech companies is unlikely to materialise.
· The sell-off likely to be sentiment-driven, as the new measures should have minimal direct impact on the broader tech sector.
· The long-term growth story of the sector remains, but expect higher volatility in the near-term due to the regulatory overhang.
China hits edtech sector with sweeping reforms
On 24 June 2021, Chinese regulators announced sweeping reforms to the nation’s private education sector, the most damaging of which is to require all existing school subject-based tutoring institutions to register as non-profit entities.
Other measure include preventing such institutions from pursuing IPOs or taking in foreign capital, and putting a complete stop to vacation tutoring as well as school curriculum teaching for children below six years of age.
Saturday’s regulations come as the government seeks to rein in the sprawling sector, which is estimated to be worth USD 100 billion, after private equity and venture capital funds kept pouring money in over the years. The Chinese government described the sector as “severely hijacked by capital” and views it as a social problem.
Aside from putting a stop to the flow of hot money into this industry, the new rules are also intended to ease homework and after-school study hours for young children, reduce the financial burden on parents, and to maintain social equality by levelling the playing field.
Taken together, we expect these measures to have a significant negative impact on edtech companies, such as New Oriental Technology Group and TAL Education Group, and their ability to maintain the same level of profitability as before.
Barring any significant policy changes, we do not expect to see any meaningful recovery in the share prices of edtech companies, and advise investors to stay away from them considering the significant regulatory risks that are currently weighing on the sector.
New measures should have minimal direct impact on the broader tech sector
Needless to say, the impact on share prices of edtech companies has been severe, with many of them down by more than 80% since the measures were announced. The pessimism has even spilled over to the broader tech sector, dragging the Hang Seng TECH Index down by 15% since Friday.
We think that this is a knee-jerk reaction from investors and is largely sentiment driven, as the edtech regulations have minimal direct impact on the Hang Seng TECH Index. We note that within the index, only Koolearn Technology (HKEX:1797) is directly affected by the new measures. The stock had a 0.18% weight in the index as of 30 June 2021.
Even though certain big tech firms, such as the likes of Tencent and Alibaba, have investments in the edtech sector, they are relatively small compared to the scale of their core businesses and thus should not be severely impacted by the recent developments.
Long-term growth story remains intact, but expect higher volatility in the near-term
In the near-term, investors should brace for further volatility as China may continue to implement reforms on its tech sector. The heightened regulatory risk should continue to weigh on investor sentiment and will likely keep share prices at depressed levels for the time being. The lack of positive news during this period also means that there may not be a catalyst for the time being.
However, we would like to reiterate our conviction in China’s tech sector. Despite the recent developments that have taken place, we remain positive on its long-term prospects. The government has made it clear that the main purpose of the increased regulation is to safeguard consumers, and to promote healthy competition and the sustainable growth of China’s technology sector in the long run. They are not meant to stifle the growth of tech companies.
Anti-monopoly laws could be a way for China’s government to preserve the country’s innovative spirit by protecting young companies, giving them a chance to develop. This is very similar to what the government did in the past for today’s big tech companies, during which it shielded them from the threat of foreign competition, contributing to their rapid expansion.
As China seeks to achieve technology self-sufficiency – an urgent agenda in light of rising tensions with the US – opportunities still remain in the tech sector. The recent sell-off has left valuations more attractive than before, and could serve as an attractive entry opportunity for those who are able to stomach the volatility.
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in Alibaba.
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.