What happened
Shares of New Oriental Education (EDU 3.42%) stock shot up 11% through 3:33 p.m. EDT Monday.
If you own shares of this Chinese for-profit educator, you can thank Morgan Stanley for that.
Image source: Getty Images.
So what
This morning, investment banker Morgan Stanley upgraded shares of New Oriental Education in the wake of the regulatory crackdown that has devastated both New Oriental and other Chinese education stocks.
As the analyst explained in a note covered on StreetInsider.com, New Oriental's K-9 tutoring business "has been hit by the 'double reduction' regulation" in China. However, the company still has other places where it can grow, including "non-academic tutoring," tutoring of older high school students, and international education markets.
Now what
Morgan Stanley expects "it will take time to grow the new businesses, and competition will intensify." Even if you remove "all K9 revenue from our model" for the company -- about 50% of New Oriental's business -- New Oriental stock is still worth more than the $2.20 or so that it trades for on Wall Street. Indeed, Morgan Stanley values the company at $3.50 a share.
Investors should take warning, however: It may take some time for this value to become apparent.
"We forecast the company will be loss-making in F22 and F23 given additional expenses to cover employee redundancies and center closures," estimates the analyst. Once those expenses are incurred, it will become clear how profitable the new businesses (which China is allowing New Oriental to keep open) might become.
