The Chinese Government is cracking down in a big way on education providers in China. Its new policy directives include registering institutions providing after-school tutoring (AST) services in China as non-profit, and changing the current registration-based system for operating online AST institutions to one requiring government approval.
Earlier this week, China Online Education Group (COE) announced an update regarding the Chinese Government’s new policy directives regarding online and offline tutoring services. The provisions of this new policy, called the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education (the Opinion) are being carefully considered by COE.
COE is expecting that the "Opinion, related rules and regulations, and the compliance measures to be taken by the Company will have a material adverse impact on its results of operations and prospect.”
China Online Education Group is an online education platform in China, with English language education as its core expertise.
Around ten days back, the company also reduced its guidance for Q2, stating that it now expects revenues to range between RMB575 million to RMB580 million, versus its earlier guidance range of between RMB597 million and RMB603 million. (See COE stock chart on TipRanks)
The change in the regulatory environment and the guidance update prompted Needham analyst Vincent Yu to lower the price target from $36 to $32 (1015% upside), but to keep the Buy rating on the stock.
The analyst attributed the lowered guidance to two main factors. These include the decline in the number of lessons taken by students per month, and the fall in average revenue per lesson. The decrease in average revenue per lesson has been due to the rise in free lessons offered during the second quarter, according to Yu.
The analyst added, “We also expect to see a meaningful decrease in gross billing as parents postpone their classes purchases while waiting for new regulations to be introduced. That said, we believe that active student growth is still on track, which speaks to the strength of students' demand and COE's course quality.”
While the Chinese Government had yet to publish its detailed guidelines regarding online education when the Needham report was published, analyst Yu anticipated certain guidelines accurately.
According to the new regulations, AST institutions will not be allowed to provide tutoring services in academic subjects on public holidays, school breaks, and weekends. It is not clear whether this also includes "test-oriented" courses.
Yu commented, “Although COE's courses only focus on improving students' verbal communication skills, local regulators may or may not still classify COE's courses as 'test-oriented'.”
Another key regulation from the Chinese Government prohibits foreign teachers located abroad from providing tutoring services in China. It is important here to note that COE’s online and mobile education platforms enable Chinese students to take English lessons from overseas foreign teachers.
This regulation could create further operational difficulties for COE and could strongly impact its business.
Turning to the rest of the Street, consensus is that COE is a Moderate Buy, based on 1 Buy and 1 Hold. The average China Online Education Group price target of $32 implies a 956.1% upside potential to current levels.
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