Why Bright Scholar Education Holdngs Ltd-ADR (NYSE: BEDU) stock is under pressure

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Bright Scholar Education Holdngs Ltd-ADR (NYSE: BEDU) stock plunged 17.29% on Nocember 16th, 2018 after China’s state-controlled news agency, Xinhua, unveiled a draft overhaul of preschool education. The guidelines from China’s cabinet, known as the State Council, would ban privately owned kindergartens from going public and stop listed companies from buying peers with shares or cash. The proposal follows several scandals about alleged child abuse.

The move comes just a few months after Chinese regulators stopped approving new game licenses, a decision that erased billions of market value from companies including Tencent Holdings Ltd. and NetEase Inc. The government is restructuring how it reviews video games amid concerns about addiction, myopia and other ills among the country’s youth. Tencent said this week it was unable to provide further clarity on the approvals process, which has been the biggest drag on its revenue this year.

RYB Education was only a year ago at the center child-abuse allegations, suspicions of which led to a teacher being fired from one of its schools and detained by authorities. While Beijing police later said it found no evidence of impropriety, the stock never recovered after the investigation sparked fury on Chinese social media.

While policy makers say the new rules will help protect consumers, China’s benchmark Shanghai Composite Index has tumbled 19 percent this year, one of the steepest declines worldwide. The more serious issue is the signal the rules send on the Chinese government’s changing attitude to private capital in education. Just two years ago authorities were encouraging the involvement of non-state investors, prompting a wave of listings. Yuhua, RYB and Bright Scholar all went public last year and appeared initially to be investor gold. Shares of Yuhua tripled by their peak in July this year, but have since lost half their value. Bright Scholar has slumped 62 percent from its high.

Meanwhile, Chinese parents spend an average of $42,892 on their children’s education, almost double that of counterparts in countries like Canada and the U.K., according to a report last year from HSBC Holdings Plc. The potential for growth helped propel shares of schooling firms to record highs as recently as June, with recently-listed China New Higher Education Group Ltd. and China Education Group Holdings Ltd. more than doubling in value within six months. Both dropped at least 4.5 percent in Hong Kong on Friday.

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