Daily Brief: Is No Sector Safe From China’s Crackdown?

Daily Brief: Is No Sector Safe From China’s Crackdown?

over 2 years ago3 mins

Ryanair reported better-than-expected results on Monday, as Europe’s biggest low-cost airline lives out all its mid-pandemic fantasy of seeing the world again.

What does this mean?

A few factors have been working in Ryanair’s favor lately: a successful vaccination rollout, Europe’s introduction of digital travel passports, and, of course, huge pent-up demand to go somewhere, anywhere new. That led to a surge in late summer bookings and a smaller-than-expected quarterly loss, and it’s been stoking hopes for a long-awaited rebound for Europe’s airlines.

Air traffic
Source: Bloomberg

Ryanair’s expecting to post a profit this quarter too, which should help the company just about break even when its financial year ends in March 2022. It also said it’s now expecting total passenger numbers to exceed 90 million by the same point. That’s up from a previous forecast of 80 million, sure, but it’s still a long-haul flight away from the 150 million people a year it used to ferry before the pandemic broke out…

Ryanair passenger numbers
Ryanair passenger numbers | Source: the company

Why should I care?

For markets: Choose your low-cost fighter.

Investors sent Ryanair’s shares 4% higher on Monday, and the firm’s optimistic travel outlook helped boost the stocks of other regional carriers: EasyJet and Wizz Air saw their share prices tick up 4% and 1.5% respectively. But don’t be fooled: these three budget airlines are in fierce competition with one another to poach as much recovery-driven business as they can, which is why they’ve all outlined plans to grow rapidly as the pandemic starts to fade.

The bigger picture: Ryanair thinks long term.

Airlines often enter hedging contracts that allow them to buy a certain amount of jet fuel at a predetermined price, to protect them from the rising price of oil. And Ryanair, for its part, has already locked in 60% of its anticipated fuel purchases for the financial year at $565 per metric ton. That was probably a shrewd move: the price of oil hit a six-year high earlier this month, pushing the cost of jet fuel to $628 per metric ton.

Keep reading for our next story...

China Cracked Down On Its Private Education Sector

China image

China cracked down on the country’s for-profit education industry over the weekend, and this is one lesson investors won’t soon forget.

What does this mean?

The $100 billion for-profit education industry peddles the kind of extracurricular tuition that’s seen as a surefire way for China’s kids to get ahead of their classmates. It’s also one of the fastest-growing markets in the country, which is why it’s been attracting billions from tech heavyweights like Alibaba, Tencent, and ByteDance, as well as from investment firms like Tiger Global Management and SoftBank.

Or rather, it was one of the fastest-growing markets in China: that might not be the case now the government’s issued new rules banning education companies from making profits, raising capital, going public, and much more. It’s all part of a deeper backlash against an industry that the government accuses of overloading kids with work, burdening parents with expensive fees, and widening inequalities across Chinese society.

Market caps
Source: The Wall Street Journal, FactSet

Why should I care?

For markets: Education stocks learn the hard way.

Former stock market darlings TAL Education Group, Gaotu Techedu, and New Oriental Education & Technology Group all saw their share prices fall on Monday, with the latter’s collapsing almost 50%. That helped drag down a wider index of Chinese education stocks by 10%. But spare a thought for the backers of unlisted companies too: the huge stakes they own aren’t exactly worth much now that these companies aren’t able to debut on the stock market.

The bigger picture: A pattern is emerging.

The stock market carnage went beyond just education companies, mind you: this controversy has got investors worried that more clampdowns on the country’s fastest-growing sectors are inevitable – especially since it’s come hot on the heels of a broader assault on Chinese tech firms. That’s not an encouraging sign, and growth-hungry investors duly sent the Chinese stock market more than 3% lower on Monday.

Chinese stocks tumble
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