What happened

Shares of Gaotu Techedu (NYSE:GOTU) were gaining today on news that the Chinese government would issue licenses for after-school tutoring companies like Gaotu, according to The Wall Street Journal. The report pointed toward a sign of stability for an industry that has been wracked by Beijing's announcement in July that tutoring companies would be banned from making profits.

As of 2:06 p.m. EDT, Gaotu Techedu, which was formerly known as GSX Techedu, was up 9.8%. 

A boy looking at a computer at an indoor table.

Image source: Getty Images.

So what

Gaotu Techedu is one of several companies in talks with regulators to be allowed to provide tutoring services to ninth-grade students and younger. Under the plan, companies like Gaotu Techedu would have to run their after-school tutoring services as non-profits but would be able to make a profit in other ways, such as tutoring adults for professional exams. Beijing also plans to limit the price that tutoring companies can charge for after-school services, squeezing the industry in another way. The moves against the tutoring industry are designed to make China's educational system less competitive and more accessible to both rich and poor families. Ultimately, the government hopes that relieving the financial burden of education will encourage families to have more children.

The licensed companies will also have to set up a foundation to manage the non-profit side of their operations. A formal announcement is expected later this month.

Now what

Gaotu Techedu was one of several Chinese tutoring stocks, including New Oriental Education and TAL Education Group, to collapse this summer over the crackdown on the sector. Year to date, the stock is still down a whopping 94%.

While this update constitutes good news for the company, it's unlikely the stock will ever approach its former levels as the government reaffirms the ban on after-school tutoring profits. At this point, the Chinese tutoring sector is for only the most risk-seeking investors.

 

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