China’s Education Entrepreneurs Suffer $27 Billion Wealth Wipeout Amid Industry Crackdown

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China’s crackdown on the private tutoring industry has hit three of the industry’s most prominent entrepreneurs, wiping out a combined $27 billion of their wealth in mere months.

The biggest decline belonged to Larry Xiangdong Chen, whose New York-listed education firm Gaotu (formerly known as GSX Techedu) lost 90% of its value since peaking in late January. Based on his Gaotu stake, Chen, 49, has been left with a net worth of $1.6 billion–and although it’s a considerable sum, it still marks a sharp reversal from the $16.5 billion he had earlier this year.

The entrepreneur’s wealth drop is followed by 41-year-old Zhang Bangxin, who saw his fortune tumble $10 billion to $5.5 billion as his TAL Education–which is also listed in New York– dropped more than 60% over the same period. A third education billionaire, New Oriental Education & Technology’s Michael Minhong Yu, lost $2.1 billion as his New York-listed company halved in value.

The reversal of fortunes was triggered by Chinese regulators launching a campaign to rein in private tutoring, putting the brakes on a once booming industry that saw tens of millions of students going online to study as many schools were forced to suspend classes during the pandemic. But as the tutoring services raised more money and chased further growth, malpractices like pricing fraud as well as false and misleading advertising began to appear, says Guo Jingwen, a Shenzhen-based analyst at research firm Blue Lotus Capital Advisors.

On June 1, Market regulators levied $5.73 million in fines against 15 private tutoring firms including the Alibaba-backed Zuoyebang, Tencent-backed Yuanfudao and Yu’s New Oriental Education & Technology for these reasons. Chen’s Gaotu and Zhang’s TAL Education were each given the maximum fine of $76,988 in April for falsely claiming the price of their online courses.

Aside from coming down hard on the marketing practices of these companies, the central government also prohibited them from offering live-streamed courses at night to protect children’s sleep. They’re also not allowed to teach elementary school courses to pre-school minors. Regulators are following Chinese President Xi Jinping’s call in May to relieve the burden on students, and to better regulate after-school tutoring services.

“These measures clearly show the regulators’ determination to rectify the industry with heavy fists,” Guo says.

TAL Education didn’t respond to repeated requests for comment. A New Oriental Education & Technology spokesperson declined to comment. Gaotu will no longer recruit students for its Xiao Zao Qi Meng service, which provides learning courses to children aged between three to eight, a company spokesperson says. The company is also widely reported to be laying off employees, with local media 36kr reporting that one-third of its total headcount could be affected. The aforementioned spokesperson didn’t respond to repeated requests for comment on this front.

Compared with his fellow education moguls, Chen appears to have a tough road ahead. Heavy marketing spending was said to have caused Gaotu to report losses for the first quarter compared with profit a year ago. It also issued a disappointing second-quarter sales outlook, and got caught up in the fallout from the implosion of Bill Hwang’s Archegos Capital.

The U.S.-based investment firm had built a highly leveraged position in Gaotu, and then was forced to liquidate giant blocks of the company’s shares when it was unable to satisfy margin calls in March. What’s more, the company has become the target of multiple short-seller attacks, with Grizzly Research describing it as a fraud and said that its auditor Deloitte should not sign the company’s annual report in April.

Gaotu has denied the allegations, but short-sellers’ interest still amounts to 18.7 million shares, or 13% of its total float, according to New York-based data company S3 Partners.

Tommy Wong, a Hong Kong-based analyst at China Merchants Securities, says there could be more policy risks. Local media has been speculating for the past month that regulators could go as far as forbidding private tutoring companies from offering courses on weekends as well as during summer and winter vacations–a particularly busy time for the tutoring industry.

“The market hasn’t priced in the worst scenario, but has priced in some part of that scenario,” Wong says.

Blue Lotus’s Guo believes authorities don’t want after-school tutoring to be shut down entirely, but she also points out that the municipal government of Hangzhou is still clamping down. Last month, authorities there prohibited companies from offering tutoring services to elementary school students below the third grade over weekends.

To weather the headwinds buffeted the industry, all three companies have slashed spending, especially marketing spending as regulators now take a much closer look at how they promote themselves to students.

“The industry has gone from rapid growth to plateau,” she says. “Investors can no longer view the education companies as being similar to tech stocks. They can no longer expect such explosive growth.”

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