Chinese Education Stocks Gain After Post-Crackdown Business Overhauls

Posted by Admin January 27, 2023 Bussiness

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, thanks to business revamps that include selling king prawns and vegetables online.

The partial recovery has taken place as 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. That has enabled some of them to grow again from a new low base.

Back in July 2021, the shares of U.S.-listed

New Oriental Education & Technology Group Inc.,

EDU 0.50%

TAL Education Group

TAL -0.92%

and

Gaotu Techedu Inc.

GOTU -7.86%

crashed after Chinese authorities banned for-profit academic tutoring of students undergoing compulsory years of education, which goes from kindergarten through grade nine in China. The restrictions stunned international investors and sparked a broad selloff in U.S.-listed Chinese stocks, and still serve as a reminder of the potential pitfalls of investing in Chinese companies.

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, a far cry from its market value of more than $30 billion at its peak.

The share prices have since multiplied, valuing New Oriental at roughly $8 billion this week. After the Beijing-based company downsized drastically, its founder launched an online platform to sell agricultural products—from fresh produce to steaks—with teachers promoting the items in colorful and popular 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.

The company said Dongfangzhenxuan, translated loosely as Oriental Select, would help supplement revenues from other sources, including language courses for adults and overseas test preparation.

The unusual 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.

New Oriental is projecting growth of up to 17% in net revenues for its current fiscal quarter, which ends on Feb. 28. Its executives said last week that China’s lifting of Covid restrictions will also help its businesses expand.

The results and forecast were better than expected, and live-streaming business and nonacademic tutoring continue to have momentum, said Candis Chan, an analyst at Daiwa Capital Markets in a recent report. She has a buy rating on New Oriental, and believes its earnings will keep improving.

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. Gaotu Techedu is offering more extracurricular classes such as programming and chess courses. The two companies’ losses have narrowed in recent quarters.

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

Despite the nascent recovery in the sector’s shares, some international investors are hesitant to make bullish bets on China’s education sector.

Louis Lau, director of investments at California-based Brandes Investment Partners, said he would only reinvest in private tutoring companies after they show sustained profits in their new businesses.

“There are still a lot of restructuring changes ongoing within these companies,” Mr. Lau said. “To me, trying to gauge the fundamental profitability this early is a bit of a speculation.”

Through an emerging-market fund, Mr. Lau has invested in Hong Kong-listed

China Education Group Holdings Ltd.

, which operates vocational training schools—a licensed sector that has a higher entry barrier and a longer operating history.

While regulatory pressure on China’s private sector has softened recently, Josh Rubin, a portfolio manager of New Mexico-based Thornburg Investment Management, said he worries that the Chinese government might increase scrutiny 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 what times they can be conducted.