[HONG KONG] Playtime might be over for China's US$260 billion private education sector.

Companies like tutoring giant TAL have benefited from venture capitalists' enthusiasm, although stock performance has been inconsistent.

Now policy headwinds in Beijing and Washington are putting growth at risk.

Chinese parents spend between US$400,000 and US$600,000 on their children's education, according to L.E.K. Consulting. They seek an edge in the country's ferociously competitive entrance exams: gateways to better high schools, better universities, and higher social status.

That drives spending on after-school tutoring services, specialised schools, and test-cramming apps. The market is set to grow at 9 per cent through 2020, the consultancy says.

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Private equity firms took note. The first half of 2018 saw 137 education deals close, with a total value of US$2.6 billion – more than all of 2017, according to Deloitte research.

Companies like the US$19 billion TAL, university operator China Education Group and English-tutoring app provider LAIX have listed in New York and Hong Kong.

But their shareholders have gotten a bumpy ride. Stock prices have see-sawed over the last twelve months after Chinese regulators started expressing concern about "excessive profit-seeking" in the sector.

An investigation of some 400,000 extra-curricular providers by the Ministry of Education that concluded in late 2018 found over two-thirds had compliance problems.

In August the government moved to prevent education groups from controlling non-profit private schools through mergers and acquisitions, and shares took a hit on worries a wider crackdown was in the offing.

It was. In November, the country's cabinet said it would ban private kindergartens from listing, and blocked public companies from acquiring them, prompting a further sell-off.

The industry has seen its share of abuse scandals, governance issues, and uneven earnings.

TAL's share price has yet to recover from short-seller Muddy Waters' allegations of inflated profit published in June. LAIX shares have fallen by 20 per cent from its September initial public offering.

Other overseas-listed educators have seen their beat-up shares rebound in 2019. That might not last. Hopes for a trade war truce appear misplaced, bad news for Chinese equities generally and specifically for US college-prep companies.

Demographics aren't supportive either; the population of children nine years or below will shrink 17 per cent by 2028, a new study finds. Investors could get schooled.

CONTEXT NEWS

- TAL Education said on April 25 that net income for the year ended Feb 28, 2019 increased by 85 per cent year-over-year to US$367 million. The company also said that average student enrollments per quarter in the fiscal year 2019 increased by 88 per cent year-over-year.

- New Oriental Education & Technology Group said on April 23 that net income increased by 43 per cent year-over-year to US$97 million for the third quarter, while quarterly student enrollments increased by 82 per cent year-over-year.

- China's population is set to peak at 1.41 billion in 2023, according to a report by Global Demographics and Complete Intelligence released on May 2.

REUTERS