Chinese education stocks have had an interesting ride throughout 2021. And investors should be keeping an extra careful eye on this sector.
Why? For-profit education companies represent a sizable chunk of the Chinese economy. However, due to Beijing’s crackdown on the sector earlier this year, investors are reluctant to take the plunge. In recent months, the Communist Party of China has stepped up restrictions on private education. They also intensified their scrutiny and control over companies that list overseas in America, which was previously considered a lucrative equity market to drum up cash.
Furthermore, the government also disavowed overseas capital from investing in the segment. And in July, the Chinese government issued a decree to stop these companies from operating on the weekend and on vacations. The new rules require them to restructure as nonprofits.
Additionally, the ban on initial public offerings (IPOs) and overseas investment also apply to “Variable Interest Entities” or VIEs. These can be used legally by companies for stock listings in America. According to a note from Morgan Stanley, the regulatory activity stems from a desire to “strictly control excess capital flow to tutoring institutions.”
However, there have been certain developments recently that raise hopes. One example is that Beijing is looking into issuing more than a dozen licenses that will give companies an opportunity to conduct after-school tutoring. You can almost hear a sigh of relief from companies that have been under the pump since July. Investor interest is rising in the space once again. And not without good reason.
With all of that in mind, these types of developments could be a catalyst for a few Chinese education stocks. In fact, this trio of tickers stands out among the rest.
- New Oriental Education & Technology Group (NYSE:EDU)
- TAL Education Group (NYSE:TAL)
- Gaotu Techedu (NYSE:GOTU)
Now, let’s dive in and take a closer look at each one.
Chinese Education Stocks to Buy: New Oriental Education & Technology Group (EDU)
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The New Oriental Company is the largest private education provider in China with offices located throughout Beijing. It offers courses on everything from English language instruction to computer science programming, all at competitive rates tailored to each student’s needs — not just what you can afford.
New Oriental recently announced it is ending its tutoring services for students from kindergarten through to grade nine due to the Chinese government’s recent move to more strictly regulate their country’s education system. The education provider did not welcome the development. It believes the move will considerably affect its revenue fiscal year ending May 31, 2022, onwards.
K-9 Academic AST (After School Tutoring) service represented around 50% to 60% of total revenue for both fiscal years 2020 and 2021. Hence, this is a big blow. However, on the bright side, New Oriental is expanding its reach into the global language learning market. The company has released new courses to help students of all ages and levels improve their speaking, writing and listening abilities through targeted practice sessions.
Another silver lining worth mentioning is vocational training, and how the Chinese government is emphasizing it. For years, China wants to make sure it does not have to rely on other countries for manufacturing needs. Consequently, it seeks to expand the manufacturing base through using local talent and New Oriental can play a key part in this regards.
TAL Education Group (TAL)
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TAL Education offers after-school education for students of all ages, from primary and secondary school to college. It has several options tailored towards each individual’s preference so you can choose what type best suits your needs: personalized one on one tuition sessions or group classes with other kids who are also there learning at the same time as yourself; online courses which allow people access 24/7 no matter where they live.
It’s no surprise that online education thrived during the pandemic, and TAL was one of its beneficiaries. Of course, in-person business suffered last year, which led to mixed results for TAL as a company overall. However, things are looking up in the year thus far.
In the fourth fiscal quarter, net revenues jumped by 58.9% to $1,362.7 million from $857.7 million in the year-ago period. For the complete fiscal year, net revenues increased by 37.3%. The non-GAAP loss was $233.3 million for the year, compared to the non-GAAP income of $255.4 million last year. The high operating loss is mainly attributable to increased share-based compensation and general and administrative expenses. Much like the other Chinese education stocks, TAL lost a lot of steam last year — 93.9%, to be precise. But with Beijing looking to relax its regulatory activity, the time is right to purchase this contrarian play.
Chinese Education Stocks to Buy: Gaotu Techedu (GOTU)
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Gaotu Techedu, formerly GSX Techedu, is a China-based holding company with interests in providing technology-driven education services, primarily through its subsidiaries that offer online K-12 tutoring and language courses for students at home or abroad. They are currently looking into offering professional interest classes, covering topics such as accounting, finance, marketing management, and others.
Gaotu Techedu is one of several companies seeking permission from regulators to provide after-school tutoring services for ninth-grade students and younger. The plan would require that these organizations operate as nonprofits, but they are allowed to make money through other avenues.
GAOTU has had an interesting journey to get here. Initially, shares of the data-driven education company did very well upon listing. Revenues and non-GAAP net income surged 423% and 1,021%, respectively; they were even making profits on a GAAP basis. But things changed after 2020 when revenues faced a slow down, increasing by just 237%. The worst part was that it became unprofitable. What caused this sudden drop? The company has used aggressive tactics to attract new customers. They promoted their services using discounts and free trials.
Looking ahead, positive tailwinds from a change in regulation will lead to recovery. Shares are still down 95% year-to-date (YTD), meaning there is plenty of upside to exploit.
On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.