Stocks to sell

China’s Edutech Crackdown is Bad for New Oriental Education & Technology Group

New Oriental Education & Technology Group (NYSE:EDU), a provider of private educational services in China, is watching its business collapse. This is due to regulation and China’s decision to crack down on its off-campus tutoring industry. Shares of New Oriental have losses of nearly 50% in 2022 and are down approximately 92.9% in the past year. Before thinking that EDU stock has become too cheap, trading at $10.55 at the close of Apr. 18, you should consider the following implications on New Oriental’s business.

Back in 2021, China decided to ban off-campus tutoring, holiday and weekend tutoring and stopped approving tuition centers. Furthermore, edutech platforms like New Oriental would not be allowed to raise capital through initial public offerings. The government’s intention was to ease “the burdens of excessive homework and after-school tutoring on students.”

I fully disagree with this philosophy, as access to education is essential to grow, develop and pursue your dreams. The right to education is as powerful as the right to freedom. Without proper education, you limit the freedom of your future.

It is another thing to have to deal with the high costs of private tutoring. New Oriental Education & Technology Group fired 60,000 workers in 2021 and stated its revenue fell by 80%.

No business is likely to survive in the short- or long-term with such a massive decline in sales. Yu Minhong, founder and chairman of the firm, said “Much of our business remains in a state of uncertainty.” He added, “In 2021, New Oriental encountered too many unforeseen events from factors such as policy, the pandemic, and international relations.”

New Oriental is expected to face difficult years ahead, turning a net profit in 2021 to a net loss in 2022.

Third-quarter 2022 financial results are expected on Apr. 26. This highly uncertain business environment for New Oriental is a key risk that leaves no room for optimism. Further negative surprises from China’s government could be on the horizon, harming the business prospects of New Oriental. Logic says to avoid EDU stock now.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.

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