Chinese tutoring firms could spin-off units, boost non-academic tutoring

Battered by a regulatory crackdown, China’s multi-billion dollar private tutoring sector could seek to separate its business segments and bulk up non-academic tutoring as it tries to soften the blow on its operations, analysts said on Monday.

Shares in Hong Kong and U.S.-listed education firms such as New Oriental Education & Technology Group (9901.HK), TAL Education Group (TAL.N) and Gaotu Techedu (GOTU.N) fell sharply for the second straight session on Monday after China barred for-profit tutoring in core school subjects.

While the firms said they expected the new rules to have a material impact on their after-school tutoring services, some analysts expect some of the largest education providers to take steps to mitigate the impact on their businesses.

“Tutoring companies likely have to dispose of K-9 academic tutoring businesses,” China Renaissance Securities analyst Don Lau said in a note.

Mark Haefele, chief investment officer at UBS Global Wealth Management, noted that implementation of previous regulations has “often not taken the strictest form” and said listed after-school tutoring firms may look to spin off their school curriculum-based businesses and focus on other areas to avoid delisting.

Under the new rules, all institutions offering tutoring on the school curriculum will be registered as non-profit organisations, according to an official document.

China’s education industry sub-index (.CSI930717) plunged as much as 15% from Thursday’s close.

Morningstar Equity Research said in a report that it believed “both New Oriental and TAL would need to adjust their K-12 academic businesses and likely spin off the non-profit mandatory education businesses in the longer term – while keeping high schools and other business such as overseas test preparation, adult English, and general English.”

It expects both providers to invest in non-academic tutoring such as art, computer coding, sport, music, and other extra curricular programs to keep their companies to remain listed.