Beaten-down Chinese education stocks can recover by double-digits as the industry shifts to businesses like vocational training following this summer’s regulatory crackdown, Morgan Stanley analysts said.
U.S.-listed after-school tutoring giants New Oriental Education & Technology and TAL Education have plunged by 90% this year. In July, Chinese authorities abruptly banned school-age tutoring businesses from operating on weekends and holidays, and ordered them to restructure as non-profits.
Despite the new rules, both companies have “ample cash” to expand into new businesses like non-academic tutoring, Morgan Stanley equity analysts Sheng Zhong and Elsie Sheng said in an Aug. 29 report.
They upgraded New Oriental to “overweight” and predict shares can soar by 55%, even after cutting the price target to $3.50. The company has already launched courses in art and speech, and is recruiting for dance, music and calligraphy classes, the report said. That analysis is based on a financial model excluding the kindergarten to ninth grade after-school tutoring segment, which has accounted for about half of New Oriental’s total revenue, the report said.
TAL Education derived a far greater 80% of its revenue from school-age tutoring, the analysts said. They upgraded the stock to “equalweight” and predict 7% gains ahead on a reduced price target of $5.40 a share.