Education shares plunge in Hong Kong after China steps up oversight in wake of controversies

Steep declines follow Ministry of Justice’s move to clamp down on sector in wake of allegations of shady financial reporting and lax compliance on required certification

PUBLISHED : Monday, 13 August, 2018, 7:50pm
UPDATED : Monday, 13 August, 2018, 11:09pm

Shares of mainland educational companies plunged in Hong Kong on Monday, after Beijing moved to step up regulatory oversight of a rapidly growing sector hit by allegations of dodgy financing and lax compliance with government rules.

The Ministry of Justice announced late on Friday that it was seeking consultation from the public over banning the expansion of corporations in the non-profit school sector through mergers and acquisitions, by additions to franchise chains or by partnerships in management.

On Monday, Wisdom Education International tumbled 39.8 per cent to HK$4.12, China Yuhua Education Corp slid 36.6 per cent to HK$3.40 and China Maple Leaf Educational Systems dropped 31.1 per cent to HK$4.48. Tianli Education International Holdings fell 37.4 per cent to HK$2.01, China New Higher Education Group slid 32.5 per cent to HK$4.70 and China Education Group Holdings was down 20.8 per cent to HK$9.99. China Xinhua Education fell 27.2 per cent to HK$2.79.

Shares in Chinese education firms fall in wake of Muddy Waters’ attack on TAL Education

The announcement by the ministry was the latest unsettling development for the sector.

In June, TAL Education, a leader in the sector, was accused by short-seller Muddy Waters of inflating its net profit figures by at least 43.6 per cent and using two sets of improper transactions that inflated its 2016 to 2018 pre-tax profits by up to US$153.2 million, or 28.4 per cent.

TAL denounced the claims by Muddy Waters, saying the report contained “numerous errors, unsupported speculation and malicious interpretations of events,” but its shares slid.

The mainland company trades in New York, where it fell 1.8 per cent to US$33.97 within minutes of the market opening on Monday.

Also this year, China’s Ministry of Education released a report that found widespread non-compliance with its required teaching certificates and business licences.

Mainland China’s after-school tutoring industry ripe for consolidation amid tougher government oversight

The latest rules aim to clarify the distinction between profitmaking schools and non-profit schools, analysts said. Previously, some firms operating non-profit schools were able to find ways to enjoy land tax benefits and ultimately generate profits.

“Authorities are cracking down on a private school sector that is mainly focused on chasing the return of capital rather than pursuing quality education services,” Hong Kong-based bank and brokerage BOC International said.

“If the regulations are passed, the scope of impact will range from kindergarten to grade 12, and to private colleges, with restrictions mainly applying to foreign institutions.”

The bank said that it maintained a profit forecast for the relevant education stocks, but warned of regulatory risks. If the stricter oversight proposed by the ministry went into effect, BOCI said it would lower the earnings forecasts and valuations in the sector.

A wave of claims about shady financial reporting in the sector came after seven Chinese education companies went public in Hong Kong and the US in 2017. The allegations became the foundation for a documentary, “The China Hustle,” that features Carson Block, the founder of Muddy Waters.

China’s education market will be worth 2.9 trillion yuan (US$461 billion) by 2020, according to an estimate by accounting firm Deloitte.