Insider Selling

After Effects of the Crackdown on China’s Private Education

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In June, sources speculated that Chinese lawmakers were implementing new rules focused towards the country’s Education sector. At present, it could be assumed that these moves were the answer to the competitiveness rising in the field.

In September 2021, China officially banned private tutors from organizing online, and after-school classes. The objective behind this was to possibly lessen pressures faced by school-going children, and their families who suffer the financial demands of private education. The latter has also resulted in a decrease in the country’s family demographics.

Last year, China had put a crackdown on its tech companies leading to huge losses; now, another billion-dollar industry is their latest target. The government has hammered down on the $120 Billion private tutoring Industry persistent in the country. Hence, it’s not surprising that a large number of stocks took a good beating.

Prices Nose Dive

While this news was making the rounds in the Summer of 2021, some educational institutions were hit much earlier. These included Gaotu Techedu Inc. (NYSE: GOTU), a Chinese provider of technology-backed education. $GOTU stock once closed at $142.7 earlier this year. But post-March 9, 2021, $GOTU stock price took a dive of almost 98%. The stock is now valued at $2.95 per share.

Other stocks which faced an immense decline around the same time as $GOTU included China Online Education Group (NYSE: COE) and TAL Education Group (NYSE: TAL). $COE had reached a peak price of around $30.13 on December 2, 2020, but is now priced at $2.43. The peak stock price of $TAL was $90.15 on February 19, 2021, before falling by 95.5% to a current value of $4.09.

Insider Reactions

These new regulations came as a huge bomb for certain companies, but the real story is how they reacted to the news.

New Oriental Education & Technology Group Inc. (NYSE: EDU), whose stock price went down by nearly 90% this year, announced a complete renovation. One source stated that the company donated 80,000 pieces of classroom furniture and is shifting towards the Agriculture sector.

Some companies, on the other hand, are facing stock selling in large numbers. Form 144 was pulled by an Insider at Gaotu dated March 9, 2021, valued at an estimate of $118 Million.

Multiple Insiders at China Online Edu. also began selling large portions of stock since June, 2021. 

Analysts suspect the possibility of there being more trades of similar pattern during that time period as the prices have massively plummeted and many insiders could have offloaded their stakes to avoid further losses. Usually, the trades by Chinese executives are little noticed due to the difference between SEC and China's reporting rules, as executives from US-listed foreign companies have to report their total shareholding only once or twice a year.

Is It for the Best?

While these new reforms will work against the favor of multiple tutoring practices, it is obvious that they have no choice but to comply. The real discussion is whether or not this move will achieve its main goal: easing the burden on both parents and children?

In more recent news, it was announced that Beijing has now planned to issue licenses for companies so as to continue their after-school tuition. The catch is that all these programs would be non-profit save for college-admission programs reserved for older students, known as Gaoko. This news caused the stock prices of some companies to jump by 3% to 10% on the US Exchange. But would this be enough to recover the profits of these companies?

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