China cuts its private sector much-needed slack

New Oriental Education & Technology

09/12/2024 04:26

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Chan Ka Sing
       HONG KONG, Dec 9 (Reuters Breakingviews) - China's
crackdowns on education and other sectors have crushed
businesses like tutoring outfit New Oriental Education &
Technology Group  9901.HK . But the $10 billion firm’s recent
revival shows Beijing is loosening its grip on the private
sector and reshaping it. This policy shift signals the
government will lean on entrepreneurs to boost consumption and
create jobs.
    Since President Xi Jinping imposed tougher regulations
across video games, e-commerce, fintech and other sectors in
2020, shares of the country's largest technology companies have
still yet to recover fully. 
    But it is New Oriental that emerged as the poster child for
China's "uninvestible" stocks. In 2021, the government abruptly
banned for-profit tutoring in core school subjects - its bread
and butter business. Its Hong Kong and New York shares nosedived
as much as 90% in the following year. That forced founder
Michael Yu to dismiss 60,000 employees - nearly 60% of the total
at the time - and diversify into e-commerce and double down on
what’s left of his education operations, namely, overseas test
preparation and non-academic tutoring.
    Those efforts have slowly been paying off. Revenue in the
three months to August jumped an impressive 31% year-on-year, to
$1.4 billion. The company is also forecast to deliver $75
million of earnings in the fiscal year to May, per LSEG, an
improvement from the net loss of $144 million in 2022. The stock
now trades on 16 times forecast next-12 month earnings, more
than Tencent  0700.HK  and Alibaba  9988.HK . Thanks to the
outperformance, New Oriental officially became part of Hong
Kong's benchmark Hang Seng  .HSI  index on Monday.
    Yu also has Beijing to thank. In August, officials included
education services as part of a 20-point plan to boost
consumption - widely interpreted as a greenlight for the
battered industry to grow again. In the latest quarter, New
Oriental's non-curricular classes attracted 484,000 enrollments
while the number of schools and learnings centres increased to
1,089, compared to 744 two years ago.
        In other industries, signs of regulatory easing are
showing too. Tencent's domestic games business, and its rivals',
are growing again. The recent release of the popular "Black
Myth: Wukong" even prompted praise from state news agency
Xinhua.
    Earlier this year, Yu called on Beijing to improve relations
with the private sector in order to invigorate the $18 trillion
economy. Other entrepreneurs from Tencent's Pony Ma to Xiaomi's
 1810.HK  Lei Jun have also voiced similar views. Beijing is
finally heeding their advice.
    
    CONTEXT NEWS
    Chinese tutoring firm New Oriental Education & Technology
Group on Oct. 23 reported revenue of $1.4 billion in the quarter
ended Aug. 31.
   Separately, HSI Services, which compiles Hong Kong’s equity
indexes, announced on Nov. 29 it will include New Oriental in
the benchmark Hang Seng Index, effective on Dec. 9. 

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Graphic: China's New Oriental fortunes may be turning around   
https://reut.rs/4ikmQyR
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 (Editing by Robyn Mak and Ujjaini Dutta)
 ((For previous columns by the author, Reuters customers can
click on  CHAN/  
KaSing.Chan@thomsonreuters.com))