Tianli Education's Transition Plan Fails to Convince Investors

Key Takeaways:

• Tianli Education’s stock tumbled 60% after the end of a three-month trading suspension due to a delayed release of its latest financial report
• Following China’s ban on many of its former core education services, the company plans to offer new value-added services and changed its name

By Fai Pui

The past year has been a nightmare for private Chinese school operators, whose booming business dried up overnight with the introduction of new government policies last year. In the face of losing their primary revenue source as a result of bans on most of their services, some have simply given up. Others are still hanging on, contemplating transitions, even as many are a shadow of their former selves in terms of market value.

One company attempting the transition is Tianli Education International Holdings Ltd. TEIHF, which has just released some new financials. The 20-year-old school operator was initially going to release its latest financial report last November, but missed that date after failing to reach an agreement with its auditors on the new policy’s impact. As a result, its shares were suspended in late November.

The suspense finally ended last Thursday evening when the company uploaded its financials for the first eight months of last year to the Hong Kong Stock Exchange’s website. The report omitted the four months from September to December as a result of the company’s decision to move the end date of its fiscal year back from Dec. 31 to Aug. 31, in order to stay consistent with the semester calendar in Chinese schools.

During those eight months, the company reported its revenue declined 19% year-on-year to 350 million yuan ($56.3 million). It posted a loss of 1.33 billion yuan ($214 million) for the period, compared to a profit of 380 million yuan in 2020. Those figures, which were largely before the new policies took effect, speak to the huge financial setback the company sustained last year.

On March 4 when its shares finally resumed trading, Tianli tumbled out of the gate with a 60% drop from its last pre-suspension price of HK$1.91. An infusion of investment brought it back from a low HK$0.59 to HK$1.15, but the pressure soon returned and the stock ultimately closed down 61% at HK$0.74. Like many of its peers, the company has lost 92% of its value from where it traded before word of the new policies began to circulate.

The company didn’t sit idly by, and spent HK$7.36 million ($944,000) buying back 7.6 million of its shares. But that failed to make much difference.

Investors turned their back on the company for good reason. Most of its loss in the first eight months of last year owed to a massive depreciation of up to 1.09 billion yuan for Tianli’s illiquid assets as a result of removing its main K-12 business from its books. With that business gone, the company will have a serious revenue hole to fill.

Last week’s report showed the company generated 1.21 billion yuan from its 12 comprehensive education programs by the end of last August, accounting for 75% of its revenue. But much of that could soon evaporate, given that 30 out of the 40 schools it operates across 27 Chinese cities are within the K-12 system that it must largely spin off due to the new policy.

Last July, the Chinese State Council announced a “double reduction” policy aimed at reducing the excessive burden of homework and extracurricular training on the nation’s stressed-out K-12 students. A resulting new set of regulations went into effect last Sept. 1, banning private companies and individuals from controlling schools providing K-12 education, and banning for-profit organizations from providing pre-school education. Operators of private K-12 schools were also banned from entering into transactions with related parties.

Companies have taken different approaches to the massive change. Industry stalwart New Oriental Education EDU has tried to make up for lost income by running a live-streaming platform to sell consumer goods. OneSmart International Education ONE suspended most of its operations, while RISE Education REDU plans to sell a large chunk of its assets to a private corporation.

The latest price-to-book (P/B) ratios for those three ranged from 0.58 times to 0.96 times, lower than Tianli Education’s 0.97 times. That could indicate investors are slightly more positive about Tianli, though everything is relative.

Changing business, changing name 

Tianli founder and president Luo Shi is facing the music head-on and has already taken steps to adjust to the new environment. For example, the company is separating out the high school grades from its K-12 schools to operate as separately licensed entities, which can still be consolidated into its financial results. It has also started to offer other value-added services including online education, art and sport instruction, logistics services as well as counseling for students wishing to study overseas. It also removed the word “education” from its name to downplay that part of its identity.

So, what will happen to the company’s 30 K-12 schools that will no longer appear in its financial reports? Luo said those schools would continue to operate out of a sense of responsibility to students, parents, teachers and the society. But the company will not expand further in the K-12 sector in light of the new policies, which means the schools will be run as private entities and not as part of the publicly traded Tianli.

The capital market is still somewhat confused about the new policies, said Kenny Wen, a commentator at Everbright Sun Hung Kai Co. Ltd. Tianli Education also said in its report that huge uncertainties continue to surround how the new policies will be interpreted and applied because the central and local governments have yet to release many specific rules and regulations.

“When education companies’ K-12 business can’t go on as usual, they have no choice but to transition to new businesses,” Wen said. “Whether it will pan out is everyone’s guess, so investors want to get out as fast as they can. Why invest in these companies whose future is so uncertain and have fallen so much in the stock market when there are so many cheaper options?”

Tianli is not pivoting away from its main business, but rather intends to offer new value-added services to students that have certain synergies with existing education operations. But it is abandoning its old model of buying schools. It can no longer count on K-12 operations as a source of profit, and its new businesses will require major new up-front investment.

The company is currently sitting on 2.16 billion yuan in debt and around 1.27 billion yuan in cash and cash equivalents. It will need that cash as it faces tough competition in areas like international education, overseas education and travel study that many companies are now expanding into. Will it be able to gain a new lease of life? Its post-suspension share plunge suggests investors may still need some convincing.