China private education firms tumble as Beijing tightens grip

SHANGHAI/HONG KONG (Reuters) - Chinese private education stocks sank on Friday after Beijing moved to tighten the reins on the early education sector, citing child safety issues that have hit some firms over the last year and saying that others were making too much profit.

FILE PHOTO: The logo and trading information for RYB Education Institution are displayed on a screen during the company's IPO on the floor of the New York Stock Exchange (NYSE) in New York, U.S., September 27, 2017. REUTERS/Brendan McDermid

China’s State Council said on Thursday it would not allow private kindergartens to go public as individual entities or as part of asset packages and would block listed firms from buying private kindergartens via share sales or by cash.

The move could roil a private education market estimated to be worth $260 billion and which has been forecast to see deals worth billions of dollars this year.

U.S.-listed RYB Education Inc RYB.N, which was hit by a child abuse scandal in China last year, dropped over 50 percent overnight, wiping off $200 million from its market valuation. In Hong Kong and Shenzhen peers dropped sharply on Friday.

The move by Beijing is the latest regulatory crackdown to rattle investors, following its moves to rein in sectors from online lending to gaming.

“It came as a surprise,” said one Hong Kong-based investor in China’s education sector, who declined to be named due to the sensitivity of the issue. “If the education companies are legal, they should be treated as any other business.”

The investor said the rules had created a lot of confusion about what already-listed private education firms should do, including whether they would be forced to delist.

In a draft document laying out the plans, China’s cabinet said it would look to standardize pre-education, bolster “lagging” teaching standards and look to curb excessive profit-seeking.

“Some kindergartens are overly profitable and some child safety issues have occurred,” the state council said.

“This relates to the healthy development of millions of children, social harmony and stability and the future of the Party and the state.”

Brokerage Jefferies said in a note the move was likely part of a government push to gain more control over the sector as it looks to improve access to pre-school education.

“We believe the new regulations may be a response to the large amount of private equity money flooding the market trying to buy up private kindergartens, driving up prices,” it said.

Jefferies added a final draft of the law would likely come out by the first quarter of next year and that key questions were whether rules would be applied retroactively and if variable interest entity (VIE) ownership would be allowed.

China’s overall private education market is worth around $260 billion, according to a June note from LEK Consulting, and is growing at around 9 percent per year. The consultancy expects around $3.5 billion worth of education deals in China in 2018.

China has been cranking up regulation of the private education sector this year, with earlier draft rules released in August also spooking the market then.

The RYB case last year, involving allegations of child abuse, had sparked widespread anger in China about the lack of trained teachers, low wages and poor regulatory oversight in the massive and fast-growing private pre-school sector.

Reporting by Adam Jourdan; Editing by Stephen Coates and Muralikumar Anantharaman