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Why New Oriental Education Stock Plummeted 74% Last Month

By Chris Neiger – Aug 6, 2021 at 10:49AM

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The Chinese government's crackdown on private tutoring businesses slammed the stock.

What happened

Shares of New Oriental Education & Technology Group (NYSE: EDU), the largest provider of private educational services in China, plunged by 73.5% in July, according to data provided by S&P Global Market Intelligence, after the Chinese government implemented new rules restricting private tutoring in the country. 

So what 

The first massive share price drop came on July 23, when New Oriental Education issued a press release addressing China's potential ban on certain types of private tutoring. 

A white arrow pointing down on a red chart.

Image source: Getty Images.

Management said that it had "not received official notification of the regulations," and added: "It's the Company's policy not to comment on market speculations."  The statement did not calm investors' fears one bit, and by the end of the trading day, New Oriental's share price had fallen by 54%. 

The Chinese government has ramped up its regulation of private tutoring businesses in the country as it tries to ease the cost of raising children, part of a broader effort to boost the country's low birth rate. 

Now what

In addition to the new tutoring restrictions, which have already begun rolling out in cities across China, the government has been putting increasing levels of pressure on China-based tech companies that are listed on U.S. stock exchanges. Beijing leveled a massive $2.8 billion fine on Alibaba in April, and recently forced DiDi Global -- China's largest ride-hailing company -- to remove its app from Chinese app stores and stop signing up new customers.

The government appears to be cracking down on these large corporations with little regard to the financial impacts that result. A recent Wall Street Journal article estimated that more than $1 trillion in market value has been erased from Chinese tech giants because of Beijing's recent moves. 

In short, investors should be very cautious before buying shares of New Oriental Education, or other China-based companies, right now.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. The Motley Fool recommends New Oriental Education & Technology Group. The Motley Fool has a disclosure policy.

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