My key takeaways from the article @Islay has posted (which is a...

My key takeaways from the article @Islay has posted (which is a very good summary of what this reform is about) are the following:

Hourly Price Caps

“It is very hard for governments to control prices in any market. These hourly price caps, given the price increases associated with quality improvements in child care, may end up creating a two-tiered market, with high-end providers charging what the market will bear and low-end providers tying themselves to the subsidy rate.”

The introduction of hourly price caps indexed to CPI is, everything else being the same, a negative for the industry as a whole, in that it reduces the pricing power of private childcare operators.

That could justify, from an investor’s perspective, a reduction of the exposure to childcare and a reallocation to other sectors that are perceived as likely to  outperform inflation more substantially in the long term. This is what I think may have influenced Challenger and Greencape’s decision to sell down.

On the other hand (as it is rightly observed in the article), the very same price caps will also increase, within the childcare sector, the competitive advantage of high-end providers. For, it will be easier for a high-end operator to charge an above-inflation fee increase than it will for a low-end one; easier in the sense that the above-CPI portion of the increase, which is now going to be fully passed to the end client, will be more easily absorbed by a wealthier client base. Therefore, I think it would make sense for the bigger players like GEM to increase their focus on that end of the market.

Activity Test

“It’s not clear what effect all this will have on workforce participation. On average, women from the wealthiest families will work less. On average, women from less well-off families may end up working more in response to the new policy. One might expect an overall positive impact on total female labour force participation but this depends greatly upon the economy’s ability to deliver jobs. This will vary greatly by geographic region.”

As I mentioned in a previous post, I see this reform as a net incentive for women (or more generally for non-full-time-working parents) to work more, which should result in a net increase in demand for childcare (especially in states like WA and QLD that had previously identified by GEM as areas of weakness). It is true, though, that the most incentivised families will be the less well-off ones, which could result in an increase in demand mostly at the low end of the market. This could give low-end operators a boost in terms of occupancy rates, if not in terms of pricing power. More generally, a net increase in demand should entail higher occupancy rates across the industry, everything else being the same.

Overall, as a GEM shareholder, I am rather neutral with respect to this reform. It does not change my belief that the childcare industry as a whole will keep growing at an above-inflation rate (albeit, arguably, not significantly above inflation anymore) and that GEM, as the highest-margin player, will remain in a position of competitive advantage. The valuation remains in my view undemanding, and therefore the investment case for me is still intact.

All IMHO & DYOR