One of the biggest losers from Chinese President Xi Jinping’s crackdown on the private sector has turned into a surprise stock-market darling after overhauling its business model.
New Oriental Education & Technology Group Inc., which tumbled more than 95% from its all-time high amid Xi’s shock move to ban swathes of the for-profit education industry, has more than doubled this year as it broadens its focus to e-commerce and travel. That ranks New Oriental among the top gainers on the Nasdaq Golden Dragon China Index.
The US-listed stock is now trading at its highest level since July 2021, the month China shocked the business world by outlawing much of the private education industry. Though still well below its all-time high, New Oriental has been able to bounce back by capitalizing on the exit of some rivals as well as offering new services.
“It’s a fascinating tale of a Chinese company that was hit by all the regulations but managed to transform its business and grow,” said Grace Yan, portfolio manager at Nikko Asset Management Asia Ltd. “They have expanded successfully into livestreaming e-commerce, and now with cultural tourism as well.”
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China’s education technology sector had grown to $100 billion before Beijing moved to ban profiting on classes related to the compulsory curriculum for kindergarten to ninth grade. Some players have quit the business in the wake of harsh measures to curb high consumer costs and aggressive industry competition.
That’s helped bigger firms like New Oriental benefit through increased market share. The company reported revenue growth of 48% in the most recent quarter compared with the year before, with its highest gross margin since 2017, data compiled by Bloomberg shows.
“Strength in new business units and resilience in traditional units should help foster sustainable growth for education market leaders,” Morgan Stanley analysts including Eddy Wang wrote in a recent note. The broker initiated coverage of New Oriental and rival TAL Education Group at overweight.
Those traditional businesses include overseas study, a strength of New Oriental, as well as high school, where greater regulation still remains a threat. Other new fields the company has pushed into include non-academic tutoring, learning devices and “cultural tourism” for the elderly.
New Oriental’s efforts have helped it rebound more quickly than rivals. While its stock has more than doubled this year, TAL Education has gained 38%.
Despite its outperformance, New Oriental should continue to gain as its larger scale continues to feed more sales growth and margin improvement, according to Morgan Stanley’s Wang. Analysts have an average price target of $78.6 on the stock, according to Bloomberg-compiled data, implying a 9% upside from Tuesday’s close.
(Updates with information on average price target in the last paragraph.)
