What happened
The first six months of 2021 could not have been more unkind to New Oriental Education & Technology Group (EDU +1.54%) as the Chinese online education stock plummeted 55.9% for the period, according to data provided by S&P Global Market Intelligence, after an earnings report that failed to impress was followed by a regulatory crackdown on for-profit educators.
So what
New Oriental's fiscal second-quarter earnings report in January underwhelmed the markets despite beating expectations and offering guidance mostly in line with forecasts.
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That was followed by prohibitions on private tutoring companies from advertising their services in the state-owned media, tutoring pre-K children, and offering online education courses after 9 p.m.
Beijing followed those restrictions with new regulations that banned private tutoring on academic campuses and weekend tutoring off campus. "Foreign curricula" will also be forbidden to be taught to students up to grade 9.
Now what
The regulatory framework being imposed has the potential to eliminate as much as 80% of revenue streams from private, for-profit companies like New Oriental Education.
China demands conformity and crushes dissent. It tightly controls what its people can know and bans foreign social media platforms to ensure the Chinese people can't learn the truth of their government's actions.
Operating for-profit businesses in the communist country is already a dicey proposition, but Beijing is keeping its stranglehold on information by these new rules, making New Oriental Education & Technology Group a poor investment.
Although beaten-down value stocks are often fertile ground for a recovery, there seems to be little chance of that happen here unless the government reverses course, and that seems unlikely.
