Why Chinese education stocks collapsed today

What happened

Oddly enough, the shares of three of China’s best-known education stocks, listed on the stock exchange – TAL Education Group (NYSE: TAL), New oriental education (NYSE: EDU), and GSX Techedu (NYSE: GOTU) – are in free fall today. At noon EDT on Friday, TAL stock is down 17.7%, New Oriental is down 20.4% and GSX is down worst of all – 21.4%.

The question is: why?

Image source: Getty Images.

So what

To find the answer, you have to go back a few weeks time when news began to filter through Bloomberg about Chinese authorities conducting snap inspections of out-of-school tutoring establishments.

In an unchallenged denial, New Oriental issued a statement at the time telling Bloomberg it had “no comment on the recent media report,” noted TheFly.com. But earlier this week Citigroup analysts got wind of the story and downgraded TAL Education, its New Oriental counterpart, removing its “buy” rating and lowering its target price of $ 20 on that stock to $ 72 per share.

There has been little news on the matter since then, with none of the three companies issuing any statements, nor many media reports on what is going on. And stocks have held up rather well in the absence of new rumors. For example, New Oriental Education stock has only lost about 5% of its value since the story started two weeks ago until yesterday’s close.

Now what

But that all changed today when the investment bank Jefferies reported that China may prohibit the use of online education for students under the age of seven, and may also prohibit online education companies from advertising in Chinese state media.

With no more details on the new regulations – or even an explanation of why they might be put in place – it’s hard to say just how much this situation will get worse. For what it’s worth, Jefferies himself says he sees little likely impact on business operations.

Regardless, in the current atmosphere of confusion and lack of access to accurate information (an all too common problem when investing in international actions), investors are taking a “shoot first, ask questions later” approach to Chinese education stocks – and sell them en masse.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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