China private education firms tumble as Beijing tightens grip (updated)

China Maple Leaf Educational Systems

16/11/2018 07:38

* State council tightens rules for private pre-schools
    * Shares in China private school providers drop sharply
    * Safety issues have put private kindergartens in spotlight

 (Adds investor comment, private education market size, analyst
note)
    By Adam Jourdan and Kane Wu
    SHANGHAI/HONG KONG, Nov 16 (Reuters) - Chinese private
education stocks sank on Friday after Beijing moved to tighten
the reins on the early education sector, citing child safety
issues that have hit some firms over the last year and saying
that others were making too much profit.
    China's State Council said on Thursday it would not allow
private kindergartens to go public as individual entities or as
part of asset packages and would block listed firms from buying
private kindergartens via share sales or by cash.  urn:newsml:reuters.com:*:nH9N1XO00F
    The move could roil a private education market estimated to
be worth $260 billion and which has been forecast to see deals
worth billions of dollars this year. 
    U.S.-listed RYB Education Inc  RYB.N , which was hit by a
child abuse scandal in China last year, dropped over 50 percent
overnight, wiping off $200 million from its market valuation. In
Hong Kong and Shenzhen peers dropped sharply on Friday.
 urn:newsml:reuters.com:*:nL4N1XR1BJ
    The move by Beijing is the latest regulatory crackdown to
rattle investors, following its moves to rein in sectors from
online lending to gaming.
    "It came as a surprise," said one Hong Kong-based investor
in China's education sector, who declined to be named due to the
sensitivity of the issue. "If the education companies are legal,
they should be treated as any other business."
    The investor said the rules had created a lot of confusion
about what already-listed private education firms should do,
including whether they would be forced to delist.
    In a draft document laying out the plans, China's cabinet
said it would look to standardise pre-education, bolster
"lagging" teaching standards and look to curb excessive
profit-seeking.
    "Some kindergartens are overly profitable and some child
safety issues have occurred," the state council said.
    "This relates to the healthy development of millions of
children, social harmony and stability and the future of the
Party and the state."
    Brokerage Jefferies said in a note the move was likely part
of a government push to gain more control over the sector as it
looks to improve access to pre-school education.
    "We believe the new regulations may be a response to the
large amount of private equity money flooding the market trying
to buy up private kindergartens, driving up prices," it said.
    Jefferies added a final draft of the law would likely come
out by the first quarter of next year and that key questions
were whether rules would be applied retroactively and if
variable interest entity (VIE) ownership would be allowed. 
    China's overall private education market is worth around
$260 billion, according to a June note from LEK Consulting, and
is growing at around 9 percent per year. The consultancy expects
around $3.5 billion worth of education deals in China in 2018.
    China has been cranking up regulation of the private
education sector this year, with earlier draft rules released in
August also spooking the market then.  urn:newsml:reuters.com:*:nL4N1V42UZ
    The RYB case last year, involving allegations of child
abuse, had sparked widespread anger in China about the lack of
trained teachers, low wages and poor regulatory oversight in the
massive and fast-growing private pre-school sector.

 (Reporting by Adam Jourdan; Editing by Stephen Coates and
Muralikumar Anantharaman)
 ((adam.jourdan@thomsonreuters.com; +86 21 6104 1778; Reuters
Messaging: adam.jourdan.thomsonreuters.com@reuters.net))