President Xi Jinping’s education reforms last year erased 90% of the value of China’s largest private-sector education company, New York-listed New Oriental Education, undoing decades of hard work. its founder Yu Minhong.

When Yu swore to rise again, few expected the godfather of modern Chinese private education to turn to hawking steaks, books and lipstick to rebuild his business empire.

Yet live streaming that combines English training and history lessons with unapologetic product sales is central to Yu’s move from physical classrooms to online services.

The popularity of videos from New Oriental and its Hong Kong-listed subsidiary Koolearn Technology – some of which attract millions of viewers – caught the attention of investors and caused the share price to rise 125% over the of the last three months.

Yu’s ability to rebuild New Oriental’s business has now become a litmus test of Beijing’s attitude toward businesses damaged by Xi’s regulatory crackdown.

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New Oriental’s fortunes may also shed light on whether Chinese entrepreneurs like Yu understand where Beijing’s new “red lines” lie since the Chinese Communist Party’s reassertion of control over the business landscape.

“It looks more like a thick band of red line with gray edges,” said Liqian Ren, a China watcher and director of WisdomTree Asset Management in the United States. “And the government could push the limits.”

A year ago, Beijing banned for-profit companies from tutoring elementary and middle school students, destroying New Oriental’s main source of income.

The sudden rule change was a warning to companies beyond China’s education sector of the potential of Xi’s sweeping “common prosperity” policy – which was rolled out in the name of reducing social inequality and of mastering big business – to radically reshape an entire industry.

Now, Citi analysts are among those advising clients that the worst is over for China’s private education. The US bank has a ‘buy’ rating on New Oriental, after the group laid off 60,000 staff in January and announced a loss of $876 million for the six months to November last year.

Citi expects shares of New Oriental in Hong Kong to recover more than 40%, thanks in part to the group’s ability to use its live feeds to sell goods.

“We believe New Oriental has a visible long-term growth trajectory, aided by strong demand for quality education services in China,” the bank’s analysts said.

JPMorgan points out that New Oriental’s net cash of about $4.3 billion is greater than its current market capitalization of about $3.9 billion. Bank analysts also said the company’s share price, which is still down about 88% from its peak in February last year, was “punitive” following the Xi’s reforms.

“Investors are literally being paid to wait for the restructuring to be completed . . . and establish its path to scale and profitability,” said a JPMorgan analyst, noting that the process could take several years.

New Oriental declined to comment.

Yu Minhong giving a speech
Yu Minhong has pledged to rebuild New Oriental’s business © Bai Kelin/Imaginechina/Reuters

Yu, a prolific social media user, has made it clear that pandemic controls under China’s zero Covid policy continue to have a “high impact” on his business, forcing the suspension of offline classes and a wave of refunds. .

The 59-year-old also warned the losses could continue for years. But he is unwavering as he tries to revive the business he started in a single classroom of a dilapidated building in Beijing in 1993.

“The most important thing is to ignite the light in the hearts of children,” he said in June.

The company plans to focus more on education-related activities, such as live streaming and book publishing, tutoring for English proficiency tests and advising on foreign university admissions, which are activities that Beijing has not banned.

However, staff at New Oriental and other major Chinese companies said they were still trying to gauge the limits of the government’s tolerance.

In a decision seen by some as signaling a reprieve for private sector companies, Beijing on Thursday fined leading ride-hailing group Didi $1.18 billion for data security breaches. The fine seemed likely to pave the way for Didi to resume signing up new customers after a year of regulatory purgatory.

But Tencent, the Shenzhen-based social media giant that has also been hit by Xi’s regulatory storm, has cut its stake in Koolearn, fearing the common prosperity surge will make the rampant consumerism propagated by live streaming too risky. .

Controversy involving China’s leading online shopping host Li Jiaqi has fueled concerns over government controls on live streaming. Li is known as the “lipstick king” for marketing makeup to tens of millions of followers on Douyin, China’s version of TikTok. But he disappeared from public view after presenting a tank-shaped dessert a day before the June 4 anniversary of the bloody 1989 crackdown on protests in Beijing’s Tiananmen Square.

New Oriental isn’t the only company that’s been hit by regulatory crackdowns turning to e-commerce live streaming. Qudian, a Chinese online microlender, also made the move this year. The New York-listed internet finance company, which has seen its market valuation plummet $4.2 billion since Beijing banned lending to borrowers with no income in December 2017, is now aiming to become a “food company”. During a marathon 7 p.m. live streaming session this month, Qudian founder and general manager Min Luo sold 9.56 million ready-to-cook meals.

Jing Daily, a trade publication covering China’s luxury market, said New Oriental had “distinguished itself” from typical live streaming with its free English lessons, rather than steep product discounts. However, the publication also warned that “as the livestream industry is saturated in China, the rivalries within it are fierce”.

“So far, [New Oriental’s] The channel has generated substantial social buzz with its unique approach to live streaming. Let’s see how long this can keep the hype going,” Jing Daily added.

The crackdown on private education companies was part of a broader effort to lower the cost of childcare to boost the country’s low birth rate. But demand from Chinese parents for education-related services appears to remain strong amid an ultra-competitive labor market and record youth unemployment.

A teacher, who asked not to be named but taught with New Oriental for 10 years, said she had started teaching children ‘next door’ since the ban, a move which carries immense personal risk .

“I have to be very careful in choosing parents. If you let in a troublesome parent who ends up reporting you, then you’re done,” she said, adding that many more parents wanted to send their children abroad because the new regulations had limited their access to guardians.

Still, industry insiders said lingering regulatory risk means there is little chance of a return to the golden age of Chinese private education.

“Before the regulations changed, the expression was Spicy – lie in your bed and win,” Professor New Oriental said. “For the salespeople, all they had to do was sit at the desk and wait for customers to arrive. The days of Spicy They succeeded.”

Additional reporting by Gloria Li and William Langley in Hong Kong