Shares of TAL Education Group (TAL), a provider of after-school tutoring (AST) services, crashed 70.8% on Friday to close at $6 per share following the announcement of new regulations for Chinese tutoring service providers.
The new regulations relate specifically to companies providing tutoring on academic subjects in China’s compulsory education system. The General Office of the CPC Central Committee and the General Office of the State Council issued numerous directives in a bid to regulate the industry. (See TAL Education stock charts on TipRanks)
As per the new directives, the AST providers are to become non-profit organizations, and no new licenses will be issued for the industry. Additionally, foreign ownership in AST is prohibited, and any institutes with such structures need to be rectified. Also, listed companies are banned from raising funds for such businesses.
Furthermore, the AST providers are not to teach on public holidays, weekends, and school breaks, and fees for tutoring services are to be aligned with the standards to be established by the relevant authorities.
In response to the regulations, TAL stated that the company will comply with all the new directives, which will have a “material adverse impact on its after-school tutoring services…which in turn may adversely affect the Company’s results of operations and prospect.”
Following the news, Goldman Sachs analyst Christine Cho downgraded the stock to a Hold from a Buy and lowered the price target drastically to $5.60 (6.7% downside potential) from $53.
Cho believes the new regulations will slash the total addressable market of the AST industry to $24 billion by 2025 from the $100 billion valuation in 2020 and also sees “significant implications to the industry structure and profit pool” for the Chinese tutoring sector.
Moreover, due to the ban of teaching on public holidays and vacations, the analyst significantly cut the revenue estimates for such companies believing that this would lead to operating losses and/or larger losses than previously expected.
According to TipRanks’ Smart Score rating system, TAL Education Group gets 1 out of 10, suggesting that the stock is likely to underperform market expectations.
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