What happened
Shares of New Oriental Education (EDU -13.96%) have tanked this week as investors brace for the Chinese government's anticipated crackdown on the private tutoring industry. The government is expected to unveil a set of strict regulations designed to tighten controls on the sector. As of 1:40 p.m. EDT on Thursday, New Oriental Education shares had shed 21% of their value week-to-date.
So what
While reports around the government's plans had been circulating for months, Reuters said on Wednesday that the new rules will be much worse than expected. An anonymous source told Reuters that private tutoring companies "should be preparing for the worst." The government is reportedly looking to implement a ban on online and offline tutoring services during weekends and certain holidays that could result in the consumer discretionary companies losing 70% to 80% of their revenue.
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China's Ministry of Education has just created a new department, dubbed The Off-Campus Education and Training Department, tasked with overseeing the private tutoring market, according to the South China Morning Post. The new division will determine requirements as well as implement a system that determines if tutoring institutions are qualified.
Now what
New Oriental Education also received a downgrade from Wall Street related to the crackdown. Morgan Stanley (NYSE:MS) cut its rating on the stock from overweight to equalweight, with analyst Sheng Zhong reducing her price target from $20 to $8.60. The analyst notes that roughly 50% of New Oriental Education's revenue should not be impacted by the changes, and that many of the negative catalysts are already priced in.
"Under tightened regulations, we assume in our base case that offline center additions will be much slower than before and tutoring hours will be shortened," Zhong wrote in a research note to investors. "At the same time, OMO (online merged with offline) will be in greater demand given less offline capacity."
