The education company’s shares fell 1.6% after it was cited by the U.S. securities regulator for non-compliance with the Holding Foreign Companies Accountable Act
- The U.S. Securities and Exchange Commission has added TAL Education and two other firms to its list of Chinese companies that could be delisted
- The SEC and its Chinese counterpart have been silent for more than a month on their talks for a key information-sharing deal to end the delisting threat
By Doug Young
And the list goes on.
After a frenzied period where dozens of New York-traded Chinese companies were cited as being at risk of delisting by the U.S. Securities and Exchange Commission (SEC), the addition of new names to the agency’s list has slowed considerably in recent weeks. But that doesn’t mean the list is complete, as three new names have just been added in the latest update.
The only noteworthy company in the update is TAL Education Group (TAL.US), one of China’s earliest education companies to list in the U.S. back in 2010, with a current market value of more than $3 billion. The other two, FingerMotion Inc. (FNGR.US) and Mercurity Fintech (MFH.US), are relatively small, with market caps of just $65 million and $11 million, respectively.
TAL’s addition to the list was pretty much a non-event for investors, with its shares down just 1.6% on Monday. In the past, inclusion on the list would often spark a sell-off for a company’s shares and even for all U.S.-listed Chinese stocks, as investors fretted about the delisting threat.
At this point that sort of panicky selling has pretty much died out, since everyone is aware that the roughly 250 Chinese stocks listed in the U.S. are all in danger of delisting, regardless of whether their names have appeared on the SEC’s list. At this point that list has 198 names, and would rise to 201 with the addition of TAL and the two others.
For those who haven’t followed the issue that closely, the delisting threat stems from the U.S. Holding Foreign Companies Accountable Act (HFCAA), which was passed in 2020 and threatens to delist any companies whose auditors refuse to cooperate with SEC investigations. That situation applies to nearly all U.S.-listed Chinese companies since Chinese law considers such information state secrets and bans auditors from sharing it with foreign governments.
China has indicated it wants to change its rules to allow for such information sharing, and both the SEC and the China Securities Regulatory Commission (CSRC) have publicly confirmed they are in talks for an agreement that would bring Chinese companies into compliance with the HFCAA.
From our perspective, what’s most interesting about the latest SEC update isn’t the addition of new names to the list. That’s because we’ve known for a while now that the SEC simply adds names to the list shortly after each company files its latest annual report. TAL Education filed its latest annual report on June 14.
Instead, what’s more interesting is the recent silence surrounding this longstanding conflict. The CSRC has sounded a steady series of positive signals since the start of this year confirming talks were in progress and saying it was confident a deal was near. Signals from the SEC were far more cautious, culminating with the May 24 publication of comments saying that “significant issues” remained before the delisting threat would be removed. Since then, however, both sides have gone unusually silent over the past month.
Silence is golden?
In our view, the silence was probably prompted by a request from the SEC asking the Chinese side to stop making public comments on the matter and focus on reaching a deal. The two sides actually came close to reaching such a deal back in 2013, but the talks ultimately collapsed, probably because there was no delisting threat at that time.
Thus, the latest silence could show the two regulators are finally getting serious and trying to finalize a deal without the kind of public scrutiny or expectation that comes when one or both sides comment publicly on the matter. Even if they reach a deal, the SEC has pointed out that more time will be required for companies to actually comply with the HFCAA before the 2023 deadline. So, there is clearly still lots of pressure on the companies.
All that said, we’ll return to TAL, since it’s at the center of attention with this latest announcement. The company mentioned the delisting threat in its new annual report, noting that its current auditor, Deloitte Touche Tohmatsu Certified Public Accountants LLP, is banned from sharing information with the SEC’s accounting arm, the Public Company Accounting Oversight Board.
But TAL is also facing an equally grave existential crisis due to a massive crackdown on China’s private education sector dating back to last fall, when companies were banned from offering after-school tutoring services in core curriculum areas to K-9 students. TAL said on its latest earnings call in April that it stopped providing such instruction – which previously accounted for the majority of its revenue – at the end of last year. It also detailed its future plans to focus on instruction in critical thinking and computer programming, and to provide teaching materials to other schools.
As it began the transformation, its revenue plunged 60% year-on-year to $541 million in its latest reporting quarter through the end of February. The downsizing is expected to accelerate this year, with seven analysts polled by Yahoo Finance forecasting TAL’s revenue in its current fiscal year will drop nearly 80% to $922 million.
All things considered, the stock has performed quite well recently, and is up 28% since the start of the year. Still, it’s down by about three-quarters since last July when concerns about the education crackdown began. But by now it seems fair to say investors believe TAL is positioned to survive the current shakeout and perhaps emerge as a stronger company in the next year or two.
JPMorgan was among the company’s new cheerleaders when it raised its rating on TAL to “neutral” from “underperform” about two months ago, citing the company’s extremely low valuation. TAL currently trades at a low, but not rock-bottom, price-to-book (P/B) ratio of 0.76, which is roughly in line with similar-sized peer New Oriental Education’s (EDU.US; 9901.HK) P/B of 0.88. But all of the education stocks will remain under pressure until they can demonstrate a clear path forward in the new regulatory environment.
The SEC’s delisting threat certainly won’t help the situation for TAL or any other Chinese education stock. But some might interpret the recent silence from both the U.S. and Chinese regulators to signal an information-sharing deal could be announced very soon. That would give Chinese companies roughly a year to take the necessary steps to comply with the HFCAA.
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