Emerging From Crackdown, Chinese Ed-Tech Firms Make a Return to U.S. Market
Chinese education companies are once again going public in the U.S. following a regulatory crackdown by the Beijing government that temporarily put a halt on homegrown tech firms listing abroad.
Golden Sun Education Group, a foreign language tutoring provider for K-12 students and adults, recently became the first China-based ed-tech firm to successfully pull off a U.S. initial public offering since March 2021. The company, listed on the Nasdaq, raised $18 million with its initial public offering this summer.
And earlier this month, China-based education company Jianzhi Education, a digital content provider for higher education institutions, set terms for its U.S. IPO.
Together, the two companies are among a handful of Chinese technology firms that have either recently moved to become publicly traded in the U.S. or are currently vying for a listing in the wake of China’s stock regulators signaling intentions last year to ban data-heavy technology companies from listing there.
But in recent months the central government’s regulators have clarified their position and started permitting some tech firms to list abroad, prompting the return of Chinese companies to the IPO market.
Up until recently, it had been fairly common for Chinese ed-tech companies seeking to raise capital to launch a U.S. IPO for a variety of reasons: prestige, greater liquidity, a massive shareholder base and a more streamlined process compared to going public in China.
Pivoting Away From Private Schools
Since 2017, there have been 12 U.S. IPOs from Chinese education companies, including the most recent from Golden Sun Education, according to Renaissance Capital, a global IPO investment advisory firm.
However, the IPO issue isn’t the only hurdle that K-12 tutoring provider Golden Sun Education faces under China’s strict regulatory regime — all of which heightens the potential risk for investors.
Last year, China initiated a sweeping overhaul of its massive private education industry, including regulations that shut down for-profit tutoring and prevent Chinese education companies from accepting foreign investment.
To stay in line with new Chinese regulations, Golden Sun Education had to divest from two private schools that were part of a business arrangement known as “variable interest entity structures,” which facilitate foreign investment into Chinese companies.
According to the company’s IPO filing, the two private schools that were part of the VIE agreements accounted for 32 percent of the company’s total revenue in 2021 and 45 percent of total revenue in 2020.
The divestitures, the company wrote in its IPO filing, represent a “strategic shift” and have “materially and adversely impacted our operations and future prospects, as these two private schools had represented a significant portion of our business and operations.”
Golden Sun Education also has to thread the needle in another area while operating in China.
It is a for-profit tutoring provider, and Chinese regulators have targeted that type of business as part of what the government is calling its “double reduction” policy, which is aimed at reducing homework and afterschool studying for the nation’s 200 million K-12 students.
The Chinese Ministry of Education’s tutoring guidelines direct local governments to prohibit the establishment of any new off-campus tutoring service focused on what the government defines as core curriculum.
Focus on Language Learning
Golden Sun Education says in its IPO filing that it offers English, German, Japanese, and French foreign language tutorial programs, and that it is a “leading provider” of Spanish-language tutorial services. The company says part of its growth strategy is to “significantly expand our network of partner-schools nationwide to offer Spanish.”
While English and Japanese foreign languages fall under China’s definition of restricted core curriculum, according to the IPO filing, the other languages offered for tutoring services do not. [If the education space in China is] ideological, that means the private sector will largely wither away.Julian Fisher, Co-Chair of Education Forum, British Chamber of Commerce in China
And as such, the company has determined that its “tutorial centers do not provide academic subjects in China’s compulsory education system and therefore are not subject” to the for-profit tutoring ban, according to its filing.
But Golden Sun Education says the political landscape in China — either via potential new legislation or changes to the regulatory regime affecting private education — pose a lingering risk for investors.
“The Chinese government exerts substantial influence over the manner in which we must conduct our business and may intervene or influence our operations at any time.”
Government regulators could “significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our Class A Ordinary Shares to significantly decline or be worthless,” the company wrote in its filing.
Opportunities to Thrive, or “Wither Away”
Julian Fisher, co-chair of the education forum at the British Chamber of Commerce in China, said he was surprised that a Chinese education company had listed on a U.S. market given that there’s a sense of anxiety about the future of China’s private education industry.
Regulations over the last year have “put huge brakes on the expansion of the private K-12 sector out here,” he said in an interview.
Moving forward, regulatory and political uncertainty could further shake up the Chinese private education industry, Fisher said. But that’s not all — economic turmoil and the constant threat of renewed COVID lockdowns to worry about that could negatively affect the industry, he said.
“All of us who work in the private education sector out here, we don’t know where education now falls under … whether it’s moving ideally to more of a kind of free market or whether it’s now essentially an ideological space,” Fisher said. “And if it’s ideological, that means the private sector will largely wither away.”
Fisher also added that a company like Golden Sun Education is in a precarious position because it is making money off tutoring. Even if Spanish-language tutoring services aren’t currently banned from for-profit services because it falls outside of Chinese core curriculum, that “doesn’t mean that it’s a clear run” for the company
“It just means it’s unregulated for now,” he said.
The volatility of Chinese education companies on U.S. markets was highlighted just last month when an ed-tech firm that provides personalized online courses to K-12 students was suspended and delisted from trading on the New York Stock Exchange because it traded below a market cap of $15 million for 30 consecutive business days.
Shares of Zhangmen Education plummeted last year when Chinese regulators announced a crackdown on the private education industry. Share prices did not recover, and the company is now a penny stock.
Other Chinese online education companies listed on U.S. markets that have seen their stock price and market caps fall by big margins in the last year could suffer a similar fate as a result of the Chinese education crackdown.
So far, so good for Golden Sun Education, however: the company’s stock price has soared since its IPO.
The company sold shares during the IPO for $4, and opened at $19 on June 22. Shares closed at $30.69 on Tuesday.
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