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Why Chinese Education Stocks Rebounded Today

By Travis Hoium – Jul 28, 2021 at 3:46PM

Key Points

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Is this more than a dead-cat bounce?

What happened 

Shares of Chinese education stocks bounced back sharply in early trading on Wednesday as companies try to adjust to new regulations from China's government. There are still more questions than answers about what the growth and profitability of the industry looks like, but for now, the sell-off of the last week is taking a breather. Here's where stock prices were as of 2:30 p.m. EDT today. 

  • New Oriental Education & Technology Group (EDU 6.24%) jumped as much as 15.5% in early trading and is now up 6.8% for the day. 
  • Tal Education Group (TAL 4.02%) peaked at a 20.9% gain and is currently up 11.8%. 
  • Gaotu Techedu (GOTU 11.11%) jumped 25.6% and is now up 20.8% to lead this group. 
  • 17 Education & Technology Group (YQ 15.39%) rose 15.9% early and is trading just 3.4% higher as of this writing. 

As big as most of these gains are, shares of all four companies are down sharply over the past week, and it's unlikely this is the end of the volatility for Chinese education stocks

Student taking online course at home.

Image source: Getty Images.

So what

Chinese education companies are starting to make plans to adapt to regulations released by the government last week. Those regulations include restrictions on raising capital, the end to weekend and school-break tutoring for some ages, and requirements that the companies be nonprofits.

While news of restrictions hit all of these stocks hard, as has a general crackdown on Chinese businesses over the last few months, companies are starting to think about what their future looks like. That could include offering more self-study courses or expanding into a non-academic curriculum. Where exactly these companies will offer courses isn't entirely clear, but they're already planning to expand into adjacent areas. And it's likely they will be under regulatory review in those expansions. 

Analysts have also speculated that companies might need to spin off their nonprofit businesses. Clearly, there are some changes coming in both what companies offer as well as their corporate structures. 

Now what

So, why the bounce today? 

The simple answer is that investors are betting that the sell-off is over and stocks have fallen too far. But you can see that even after today's bounce, all four of these stocks are down over 50% in just the last week. 

EDU Chart

EDU data by YCharts.

There are too many unknowns to predict a recovery for the Chinese education business, and the government seems intent on completely disrupting the current business model. I wouldn't bet against the government's desire to restrict advertising and the time burden on students and parents when it comes to schooling. That's why this is an industry I'll simply watch from afar for now. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends New Oriental Education & Technology Group and Tal Education Group. The Motley Fool has a disclosure policy.

Stocks Mentioned

New Oriental Education & Technology Group Stock Quote
New Oriental Education & Technology Group
EDU
$30.13 (6.24%) $1.77
TAL Education Group Stock Quote
TAL Education Group
TAL
$5.69 (4.02%) $0.22
Gaotu Techedu Stock Quote
Gaotu Techedu
GOTU
$1.40 (11.11%) $0.14
17 Education & Technology Group Inc. Stock Quote
17 Education & Technology Group Inc.
YQ
$1.35 (15.39%) $0.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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