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Why Chinese Education Stocks Soared on Friday

By Rich Smith – Apr 29, 2022 at 11:52AM

Key Points

  • Comments from the Chinese government suggest that the trend of passing regulatory tightening measures may be at an end.
  • Chinese tech stocks are reacting positively to the news.
  • But in the for-profit education sector, the damage has already been done -- and may be too great to reverse.

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Gaotu Techedu, New Oriental Education, and TAL Education join the tech rally.

What happened

News that the Chinese government is getting ready to wrap up its years-long crackdown on the country's tech stocks, and shift toward supporting the sector instead, sparked a rally in Chinese equities Friday morning. It didn't take long for this rally to extend to the nation's beleaguered for-profit education sector, either.  

As of 10:50 a.m. ET, shares of Gaotu Techedu (GOTU 6.04%) are up 9.9%, New Oriental Education & Technology Group (EDU 5.91%) is gaining 10.9%, and TAL Education Group (TAL -0.55%) is leading the sector higher with an 11.2% gain.

Red map of China with a rising green stock arrow superimposed.

Image source: Getty Images.

So what

China's economy grew only 4.8% in the first quarter of 2022, slower than the government's targeted 5.5% growth rate for this year -- and according to the International Monetary Fund, rather than improving, the economy looks likely to slow further as the year wears on. The Chinese government isn't happy to hear that, though, so on Friday the Politburo confirmed that it will intercede with various measures to support the economy and goose growth rates higher.

The Politburo didn't give a lot of detail on what, precisely, it is planning. But it did say that it will "wrap up its push to rectify issues at internet-platform companies," reported The Wall Street Journal today.

If you recall, China's drive to tighten regulations on tech stocks in general actually began with a campaign to rein in the for-profit education sector in particular, back in early 2021. Over the course of several months, China introduced regulations to curb advertising of after-school tutoring programs, ban the provision of paid tutoring services to pre-K kids, limit tutoring companies' access to school campus grounds, and take other measures to discourage the growth of this industry.

Over the course of about a year, these regulations (combined with other factors, to be sure) have resulted in the destruction of roughly 95% of the value of Chinese education stocks such as Gaotu, New Oriental, and TAL -- but now, it seems the trend of tightening regulations is at an end.

Now what

It's understandable why investors might take China's promise to curb the issuance of new regulations as a hopeful sign today. However, just ceasing to churn out new regulations may not be enough to save these stocks -- as today's earnings report from TAL Education makes clear.  

In a report full of bad numbers, and without many glimmers of hope, TAL reported today that it lost $0.17 per share (Wall Street had expected only a $0.12 loss) on sales of $541 million in its fiscal Q4 2022. Analysts had forecast sales of $1.3 billion. Sales at the Chinese for-profit educator plunged 60% year over year, and while the company's net losses shrank (TAL lost $108 million this year, which was 36% less than last), a loss is still a loss -- and TAL is still losing quite a lot of money. So too are Gaotu and New Oriental Education, by the way.  

Long story short, under the current regulatory regime, TAL stock -- and presumably the rest of the for-profit education sector as well -- remains on life support. Unless and until we hear that the Chinese government plans to not just stop issuing new regulations to suffocate this sector but actually roll back some of the restrictions it has already imposed, I simply don't see much to be optimistic about in any of these stocks.

Rich Smith 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.

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