Chinese Education Stocks Rise After Business Overhauls Post-Crackdown

A year and a half after Beijing's crackdown on after-school tutoring businesses, the American depositary receipts of Chinese education companies have recouped some of their heavy losses.

This is thanks to business revamps that include selling king prawns and vegetables online. These companies have been able to adapt and continue to operate despite the challenging environment. The companies have found new sources of revenue, such as e-commerce, and made further inroads into college-test preparation, adult-education programs and nonacademic courses such as robotics and art. This has enabled some of them to grow again from a new low base.

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New Oriental Education & Technology Group Inc. (EDU) is a leading provider of online education in China. The company's shares are listed on the New York Stock Exchange. In July 2021, the company's shares rose sharply after it announced strong financial results for the fiscal year ended June 30, 2021. TAL Education Group is a leading provider of educational services in China. The company offers a wide range of services, including tutoring, test preparation, and online education. TAL Education Group is listed on the New York Stock Exchange and is a member of the S&P 500.

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Gaotu Techedu Inc. (GOTU) saw its stock price drop 7.86% today. This follows a trend of declining stock prices for the company over the past few months.
After Chinese authorities banned for-profit academic tutoring of students undergoing compulsory education, which goes from kindergarten through grade nine, the stock market crashed. This stunned international investors and sparked a broad selloff in U.S.-listed Chinese stocks, reminding everyone of the potential pitfalls of investing in Chinese companies.

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The education companies were forced to exit their main business lines, lay off employees and close many learning centers, taking big financial hits in the process. New Oriental's shares touched a record low in March 2022, when the company's market capitalization was less than $2 billion. This is a far cry from its market value of more than $30 billion at its peak.

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New Oriental's share prices have multiplied since it downsized drastically, valuing the company at around $8 billion this week. The Beijing-based company's founder launched an online platform to sell agricultural products - from fresh produce to steaks - with teachers promoting the items in live-streamed videos. Last year, for instance, tens of millions of Chinese viewers tuned into the video of a former tutor, Dong Yuhui, pitching groceries while teaching English vocabulary and sharing his life philosophy.

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The company said that Dongfangzhenxuan, translated loosely as Oriental Select, would help supplement revenues from other sources, including language courses for adults and overseas test preparation. The recipe appears to be working. In the six months to Nov. 30, the New Oriental subsidiary running its live-streaming e-commerce platform turned a profit and raked in more than $293 million in revenue, making up about a fifth of the overall company’s revenue for the period. It has become New Oriental’s most prominent growth driver in the eyes of executives and analysts.

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New Oriental is projecting growth of up to 17% in net revenues for its current fiscal quarter, which ends on Feb. 28. Last week, its executives said that China’s lifting of Covid restrictions will also help its businesses expand. According to Candis Chan, an analyst at Daiwa Capital Markets, the results and forecast for New Oriental were better than expected. She believes that the company's live-streaming business and nonacademic tutoring will continue to have momentum. Chan has a buy rating on New Oriental, and believes that its earnings will keep improving.

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Tian Hou, the founder of T.H. Capital, a China-focused research and investment-advisory firm, said she believes education stocks will continue to recover as the sector has been significantly undervalued. She said demand for nonacademic classes also remains high among Chinese parents, especially in wealthy cities.
While New Oriental took an unconventional path in e-commerce, its peers have ventured into other education-adjacent businesses. TAL Education Group has been selling online-learning materials and providing technology solutions to schools, while Gaotu Techedu is offering more extracurricular classes such as programming and chess courses. The two companies’ losses have narrowed in recent quarters.

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New Oriental said in a statement to The Wall Street Journal that it would continue to invest in its remaining businesses and new initiatives. TAL didn't respond to requests for comment. Gaotu declined to comment.

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Some international investors are hesitant to make bullish bets on China’s education sector, despite the nascent recovery in the sector’s shares.
Louis Lau, director of investments at California-based Brandes Investment Partners, said that he would only reinvest in private tutoring companies after they have shown sustained profits in their new businesses. This is because he wants to ensure that the company is stable and profitable before investing any more money into it.
"There are still a lot of restructuring changes ongoing within these companies," Mr. Lau said. "In my opinion, trying to gauge the fundamental profitability this early is somewhat speculative."

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Mr. Lau has invested in Hong Kong-listed China Education Group Holdings Ltd. through an emerging-market fund. China Education Group Holdings Ltd. operates vocational training schools, which is a licensed sector that has a higher entry barrier and a longer operating history.

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Josh Rubin, a portfolio manager at Thornburg Investment Management in New Mexico, said he is concerned that the Chinese government may increase regulation of the private sector again when the economy stabilizes. Last month, Chinese authorities issued guidelines for nonacademic tutoring programs for primary and secondary school students, limiting how much companies can charge for such courses and when they can be conducted.

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"We don't know if everything is behind us," Mr. Rubin said. "Even though [the companies] appear to be adapting their business models, we can't be sure that all the challenges are behind us."