Photo: IC

For 17 trading days during March, online education firm Guangdong Qtone Education was the most expensive stock in China's A-share market. Shares in the company hit a high of 320.65 yuan ($51.64) on Wednesday, before falling sharply to close at 255.97 yuan on Friday.

Media reports said the company, which went public on January 21, 2014, had created an "A-share legend," with its share price surging from 24.18 yuan to more than 300 yuan in just 14 months. 

Record high

Shares in Qtone Education, which is listed on ChiNext, China's NASDAQ-style board for fast-growing start-ups, touched a peak level of 348 yuan per share during Wednesday trading, making it the most expensive A share in history.

The last time a stock in the A-share market surpassed 300 yuan was Shanghai-listed China CSSC Holdings on October 11, 2007, during a bull run in the market. However, its shares plummeted to a low point of 31.58 yuan on October 28, 2008 and have barely recovered since, having closed at 44.58 yuan on Friday.

Qtone Education's share price has rocketed since it announced on January 28 that it would acquire two online education companies. It then announced on March 23 a plan to buy a 25 percent stake in a Hebei-based online education firm.

Its shares had surged by nearly 300 percent as of Wednesday from 88.15 yuan on January 28. On March 3, it surpassed Kweichow Moutai Co to become the most expensive stock in the A-share market.

Qtone Education's market capitalization has also surpassed that of US-listed New Oriental Education and Technology Group, a veteran company in China's private education sector and one that reported far higher revenue and profit than Qtone in 2014.

"Investors are optimistic about the growth prospects for the online education sector, which fits well with China's 'Internet Plus' strategy," Shen Zheyan, an analyst with Shenzhen-based CIC Industry Research Center, told the Global Times Friday.

The Internet Plus strategy - which was unveiled by Premier Li Keqiang in the government work report he delivered on March 5 during the annual session of the country's top legislature - aims to integrate mobile Internet services, cloud computing, big data and the Internet of Things with modern manufacturing.

Investors' optimism was also boosted by a report on March 22 by Guangzhou-based Money Week newspaper, which named five well-known Qtone Education shareholders, including Yu Minhong, founder of New Oriental Education and Wu Ying, a veteran investor in the IT industry. However, Yu said on his Weibo on March 23 that he does not own any shares in Qtone Education. The online education firm confirmed in a statement released late on Tuesday that Yu had already sold his stake in a venture capital firm that owns shares in Qtone Education.

Overvalued

Analysts have warned of excessive valuations in the online education sector.

Qtone Education's earnings per share (EPS) reached 0.54 yuan in 2014, similar to Shanghai-listed Agricultural Bank of China's EPS of 0.55 yuan last year. In comparison, the share price of Agricultural Bank of China was 3.64 yuan as of Friday.

"The online education sector has rosy business prospects given its flexibility and interactivity. However, its high valuation will bring risks for investors," Shen said.

Qtone Education also issued a warning to investors in its statement on Tuesday, noting various risks it faces, including an excessively high price-to-earnings ratio, uncertainties in acquisition deals, and fiercer competition in the online education sector given participation by Internet giants such as Alibaba, Baidu and Tencent.

The firm's price-to-earnings ratio reached 748.2 as of Tuesday, far higher than the average price-to-earnings ratio of 125.12 for mainland-listed companies in the software and IT services industry, the statement said.

The firm also said that in 2014 its revenue and profit rose by 11.8 percent and 6.87 percent year-on-year, respectively, but said this did not represent particularly significant progress.

"The business model for China's online education companies is not clear, but that has not hindered firms' enthusiasm for grabbing market share," Wang Qiong, an analyst with IT consultancy Analysys International, told the Global Times Thursday.

About 60 online education firms in China closed down in 2014, according to data compiled by jmdedu.com, an education industry information website.

"The industry will soon see a period of consolidation, and start-ups that are short of funding and that lack innovation will be eliminated from the market," Wang said.

Bubble risk

Qtone Education has suffered a sharp reversal of its upward trend since Thursday, after market rumors said that China's securities regulator will crack down on stock price manipulation, with two companies apparently in the firing line, one of which is Qtone Education.

Shares in Qtone Education plummeted by the daily limit of 10 percent on Thursday and further slumped by 6.44 percent to 255.97 yuan on Friday. Its No.1 position in the stock price rankings has been taken by telecom services provider Longmaster Information and Technology.

Repeated calls to Qtone Education went unanswered by press time.

When asked if the market rumors were true, Deng Ge, a spokesman for the China Securities Regulatory Commission (CSRC), neither confirmed nor denied it at a regular press conference held Friday.

Instead, Deng said the CSRC had held a seminar at the Shenzhen Stock Exchange on Tuesday, discussing measures to further improve the law enforcement mechanism in the stock market.

Qtone Education issued a statement late Sunday, admitting its shares had fluctuated abnormally from Wednesday to Friday.

But it denied that it had engaged in any stock price manipulation, and said it had not received any formal information on the issue.

Qtone Education's sharp drop caused a chain reaction on the ChiNext board, with other online education companies falling heavily as well. ChiNext dropped by 3.91 percent on Thursday, the biggest drop so far in 2015.

Li Daxiao, director of research with Shenzhen-based Yingda Securities Co, warned of a bubble in the market.

"Stocks on ChiNext are trading at around 100 times their earnings on average, higher than any other major stock market in the world," Li told the Global Times Thursday.

By comparison, the average price-to-earnings ratio on NASDAQ is around 26 times, and that on Hong Kong's Growth Enterprise Market is around 10 times, media reports said.

Li said companies' high valuation on ChiNext is not sustainable.

"A series of moves that are expected from the CSRC, such as increasing the number of new IPOs, strengthening delisting rules, and improving the two-way trading mechanism, could well prick the ChiNext bubble," he said.