3 Chinese education stocks to buy amid rumors of new regulations

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Chinese education stocks have seen an interesting move throughout 2021. And investors should keep a very close eye on this sector.

Why? For-profit educational enterprises represent a significant part of the Chinese economy. However, due to Beijing’s crackdown on the area earlier this year, investors are reluctant to take the plunge. In recent months, the Chinese Communist Party has tightened restrictions on private education. They have also stepped up their oversight and control over overseas listed companies in America, which was previously seen as a lucrative stock market for hoarding cash.

In addition, the government has also disowned foreign capital from investing in the segment. And in July, the Chinese government issued an executive order to prevent these companies from operating on weekends and holidays. The new rules force them to restructure into non-profit organizations.

In addition, the prohibition on initial public offerings (IPOs) and foreign investments also applies to “Variable Interest Entities” or VIEs. These can be legally used by companies for stock quotes in America. According to a note from Morgan Stanley, regulatory activity stems from a desire to “strictly control excess capital flows to tutoring institutions.

However, there have been some hopeful developments recently. One example is that Beijing is considering issuing more than a dozen licenses which will give companies the opportunity to do after-school tutoring. You can almost hear a sigh of relief from the companies that have been under the pump since July. Investor interest is growing again in the space. And not without reason.

With all of that in mind, these types of developments could be a catalyst for some Chinese education stocks. In fact, this trio of tickers stands out above the rest.

  • New Oriental Education and Technology Group (NYSE:EDU)
  • TAL Education Group (NYSE:TAL)
  • Gaotu Techedu (NYSE:I UNDERSTOOD YOU)

Now, let’s dive in and take a closer look at each one.

Chinese education shares 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 teaching English to computer programming, all at competitive rates tailored to each student’s needs, not just what you can afford.

New Oriental recently announced that it was ending its tutoring services for Kindergarten to Grade 9 students due to the recent decision of the Chinese government to more strictly regulate their country’s education system. The education provider did not welcome the development. He believes the move will significantly affect his revenue for the fiscal year ending May 31, 2022.

The K-9 Academic AST (After School Tutoring) service represented around 50% to 60% of total revenue for fiscal years 2020 and 2021. So it’s a big blow. However, on the bright side, New Oriental is expanding its reach into the global language learning market. The company has launched new courses to help students of all ages and skill levels improve their speaking, writing and listening skills through targeted workouts.

Another silver lining worth mentioning is vocational training and the way the Chinese government emphasizes it. For years, China wanted to make sure that it didn’t have to depend on other countries for its manufacturing needs. Therefore, it seeks to expand the manufacturing base using local talent and New Oriental can play a key role in this regard.

NLP Education Group (TAL)

a child takes notes while attending an online class.  represents the actions of education.  best performing actions

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TAL Education offers extracurricular education to students of all ages, from elementary and secondary to middle school. It offers several options tailored to each individual’s preferences so that you can choose the type that best suits your needs: personalized one-to-one lessons or group lessons with other children who are also learning at the same time as you; online courses that give people 24/7 access no matter where they live.

It’s no surprise that online education flourished during the pandemic, and TAL has been one of its beneficiaries. Of course, in-person business suffered over the past year, which has led to mixed results for TAL as a company as a whole. However, things are improving in the year so far.

In the fourth fiscal quarter, net income jumped 58.9% to $ 1,362.7 million from $ 857.7 million a year earlier. For the full year, net sales increased by 37.3%. The non-GAAP loss was $ 233.3 million for the year, compared to non-GAAP income of $ 255.4 million last year. The high operating loss is mainly attributable to the increase in stock-based compensation and general and administrative expenses. Much like other Chinese education stocks, TAL lost a lot of momentum last year – 93.9%, to be precise. But with Beijing seeking to ease its regulatory activity, now is the time to buy this coin against the grain.

Chinese educational stocks to buy: Gaotu Techedu (GOTU)

a girl sitting in front of a laptop computer doing her homework.  invest for children

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Gaotu Techedu, formerly GSX Techedu, is a China-based holding company focused on providing technology-driven education services, primarily through its subsidiaries that offer one-to-one and online language courses. Kindergarten to Grade 12 for students at home or abroad. They are currently looking to offer courses of professional interest, covering topics such as accounting, finance, marketing management and others.

Gaotu Techedu is one of many companies seeking permission from regulators to provide after-school tutoring services to ninth graders and younger. The plan would require these organizations to operate as nonprofits, but they are allowed to make money in other ways.

GAOTU had an interesting journey to get here. Initially, the shares of the data-driven education company performed very well on listing. Non-GAAP revenue and net income jumped 423% and 1,021%, respectively; they were even making profits under GAAP. But things changed after 2020, when income slowed, increasing only 237%. The worst part is that it has become unprofitable. What caused this sudden fall? The company used aggressive tactics to attract new customers. They promoted their services using discounts and free trials.

Going forward, favorable winds of regulatory change will lead to a recovery. Shares are still down 95% year-to-date (YTD), which means there is a lot of potential to be tapped.

At the date of publication, Faizan Farooque had (directly or indirectly) no position on the securities mentioned in this article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.

Faizan Farooque is a contributing author of InvestorPlace.com and many other financial sites. Faizan has several years of stock market analysis experience and was a former data reporter at S&P Global Market Intelligence. His passion is helping the average investor make more informed decisions about their portfolio.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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