Forensic Analyst

Jason Yap, CFA

Forensic Accounting

The “double reduction” crackdown on K9 after school tutoring ("AST") that covers primary and middle school curriculums has inflicted major pain on the USD38 billion industry. With the original aim of easing student pressure inside and outside school, it has led to unintended consequences of tutor layoffs, early lease terminations, and fresh anxiety among parents on how to occupy their children's available after school time.
The regulations also shook the confidence of AST investors and enterprises. Weak hands folded by shutting operations, filing for bankruptcy and/or exiting investments while industry leaders with a stronger cash position frown over the best approach to pivot operations.
For industry leaders like <a href="https://www.smartkarma.com/entities/new-oriental-education-tech-grp-adr" target="_blank" data-smartkarma-citation="entities:531:1" rel="noopener">New Oriental Education (EDU US)</a> and <a href="https://www.smartkarma.com/entities/tal-education-group" target="_blank" data-smartkarma-citation="entities:1124:1" rel="noopener">TAL Education (TAL US)</a>, revenues generated from K9 academic tutoring comprise between 50% to 80% of total revenues. Hence, there is a direct material impact on forward revenue and earnings.  In addition, they will incur one-time costs for, amongst others, staff severance, early lease terminations, and refund liabilities for K9 courses that can no longer be administered.  
In August 2021, Beijing education authorities <a href="https://www.caixinglobal.com/2021-08-16/cover-story-whats-next-for-chinas-after-school-tutoring-industry-101755589.html" target="_blank" rel="noopener">extended</a> an olive branch, highlighting that AST companies may switch to sectors that aren’t affected by the new regulations, such as high school tutoring, vocational education, all-round education and adopting hybrid business models. A similar stance might by adopted nationwide and signals (at least some) policy support for the embattled AST sector.
Using TAL Education as a bellwether for the AST sector, we examine the financial and accounting concerns that arise as a direct result of the new regulations. In addition, we analyse the recent exit of a key Convertible Notes investor, who has essentially capitulated in the face of execution uncertainties of TAL's pivot strategy.  Should other investors follow?

The “double reduction” crackdown on K9 after school tutoring ("AST") that covers primary and middle school curriculums has inflicted major pain on the USD38 billion industry. With the original aim of easing student pressure inside and outside school, it has led to unintended consequences of tutor layoffs, early lease terminations, and fresh anxiety among parents on how to occupy their children's available after school time.
The regulations also shook the confidence of AST investors and enterprises. Weak hands folded by shutting operations, filing for bankruptcy and/or exiting investments while industry leaders with a stronger cash position frown over the best approach to pivot operations.
For industry leaders like New Oriental Education (EDU US) and TAL Education (TAL US), revenues generated from K9 academic tutoring comprise between 50% to 80% of total revenues. Hence, there is a direct material impact on forward revenue and earnings.  In addition, they will incur one-time costs for, amongst others, staff severance, early lease terminations, and refund liabilities for K9 courses that can no longer be administered.  
In August 2021, Beijing education authorities extended an olive branch, highlighting that AST companies may switch to sectors that aren’t affected by the new regulations, such as high school tutoring, vocational education, all-round education and adopting hybrid business models. A similar stance might by adopted nationwide and signals (at least some) policy support for the embattled AST sector.
Using TAL Education as a bellwether for the AST sector, we examine the financial and accounting concerns that arise as a direct result of the new regulations. In addition, we analyse the recent exit of a key Convertible Notes investor, who has essentially capitulated in the face of execution uncertainties of TAL's pivot strategy.  Should other investors follow?

TAL Education - Key Investor Capitulates, Should the Rest Follow?