China Cracks Down on Private Education: Are Singapore Education Stocks Next?

·4-min read
Students Doing Work
Students Doing Work

The Chinese government’s untimely intervention in its country’s private education sector has sent shockwaves through the US$120 billion industry.

The harsh and abrupt policy change, introduced just a month ago, meant that private tuition centres were forced to suspend both online and offline classes.

The draconian changes caused the stocks of US-listed Chinese education providers such as TAL Education Group (NYSE: TAL) and Gaotu Techedu Inc (NYSE: GOTU) to lose more than half their value almost overnight.

The crackdown has altered the face of the sector and caused many investors to question if their investment theses are still valid.

The purpose of this move was supposed to reduce families’ burdens as significant portions of their disposable income went to private tuition centres to boost their children’s grades.

This topic may feel familiar.

Back home, Singapore also has a pressure-cooker type education system.

The education sector has traditionally been viewed as being recession-proof, along with the healthcare sector.

But with the recent news in China, could winds of change be arriving?

Could there be a clampdown by the Singapore government on the sector?

What are the prospects for education stocks listed on the local bourse?

A love affair with private tuition

Firstly, it’s unlikely that the Singapore government will resort to such a drastic move.

While our education system is undoubtedly stressful, the government has carefully and gradually shifted away from relying on pure academic scores to decide on how to stream students.

But the truth is that grades, obviously, still do matter.

But initiatives such as direct school admission (DSA) allow for children to use their other, non-academic talents to try to get into the school of their choice.

Arguably, the introduction of the “Integrated Programme” (IP) also allows for a six-year fast-track education for the top 10 percentile of PSLE students that does away with the O Level examinations, thereby removing the focus on examinations.

But, Singaporean’s love affair with tuition will continue as attitudes are ingrained in our culture.

The government inherently realises this matters and will not want to disrupt the current status quo without making further changes to the education system.

Based on the above, it is highly unlikely that the private education sector here will see any harsh government intervention akin to what occurred in China.

A recession-proof industry?

So, if we assess that the risk of government intervention is not high, does this mean that Singapore-listed education stocks may be attractive investment candidates?

Let’s take a closer look at a few such players, namely Mindchamps Preschool Ltd (SGX: CNE), Overseas Education Ltd (SGX: RQ1), or OEL, and Informatics Education Ltd (SGX: BOU).

Based on a September 2017 research, Mindchamps holds the highest market share of 38.5% in the premium preschool market in Singapore.

The group also has a presence in Australia, the Philippines, Myanmar and Malaysia.

Despite revenue rising by 44% year on year for its fiscal 2021 first half (1H2021), net profit plunged by 57% year on year to S$326,000.

These numbers were reported despite the 4% year on year growth in the number of centres to 85 and a 5% year on year increase in enrolment numbers to 5,038 students.

OEL operates the Overseas Family School located in Pasir Ris and offers a fully integrated education program to children of expatriate families.

Revenue for 1H2021 dipped by 7.8% year on year while net profit declined by 22% year on year to S$4.3 million due to lower enrolment as the government tightened entry passes for foreign nationals.

As for Informatics, it offers mainly information technology (IT) courses in more than 50 countries and has over 170 accredited partner centres worldwide.

For its fiscal year ended 30 June 2021, the group reported a 33% year on year slump in revenue to S$7.2 million. A loss of S$1.5 million was incurred.

The financial numbers from these three education players show that the education industry is facing a tough slog and may not be as recession-proof as one may think.

The share prices of all three companies are also trading at five-year lows.

Get Smart: Study the economics of the business

China’s move to stamp out the private education sector is unprecedented and has destroyed the wealth of many investors.

Fortunately, Singapore is unlikely to follow in its footsteps.

However, as shown above, the sector is also far from recession-proof as it is also subject to competitive forces and immigration policies.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

The post China Cracks Down on Private Education: Are Singapore Education Stocks Next? appeared first on The Smart Investor.

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