China Education Stocks Soaring With Investors Souring on Others

  • Only two stand out after U.S. shares added to MSCI indexes
  • The country’s equities are among the year’s biggest losers

MSCI Inc.’s inclusion of U.S.-listed Chinese Internet giants in its benchmark indexes last year had analysts predicting a rally for the stocks as investors added those shares to their portfolios to reflect the changes.

Instead, ten out of 14 U.S.-listed Chinese stocks added to MSCI’s indexes have plunged. Only two companies, both focused on education, bucked the trend with significant gains.

Chinese equities in Shanghai have struggled to recover since a $5 trillion rout in domestic shares last year brought an end to the country’s longest-ever bull market. A gauge of Chinese stocks in U.S. trading followed suit, losing 13 percent in 2016 as of Friday, compared with 2015’s 16 percent gain.

TAL Education Group Inc. and New Oriental Education & Technology Group Inc. have soared more than 40 percent since the MSCI added them to its indexes at the close of business on Nov. 30 and are among the best of the country’s U.S.-listed performers so far this year. Chinese consumer spending on education is expected to increase 7.4 percent to $91 billion this year, according to Euromonitor International, a market research firm.

“Chinese place a very high emphasis on education and TAL Education and New Oriental Technology are benefiting from U.S. investors learning this as well,” said Brendan Ahern, chief investment officer at KraneShares, by phone from New York. “The e-commerce companies have been unjustifiably punished by U.S. investors amid rising concern that the economic growth is slowing,” said Ahern, whose company oversees China-focused ETFs.

JD.com Inc. to Baidu Inc. have lost a quarter of their market capitalization since late November as sentiment on Chinese equities soured amid concern that economic growth is slowing.

TAL Education, a Beijing-based tutoring service, has risen 33 percent this year to hover near an all-time high as revenue growth beat forecasts in seven of the past eight quarters. Beijing-based New Oriental Education has almost doubled in the past 12 months as the company’s improvements in its after-school tutoring business and a push into online learning after being one of 2014’s biggest losers among Chinese stocks in U.S. trading.

These and other Chinese companies still face headwinds because U.S. investor sentiment on China keeps deteriorating as the economy expands at the slowest pace in 25 years and bond defaults escalate, according to Ankur Patel, chief investment officer at R-Squared Macro Management LLC.

“Investors that were flocking into China last year are not turning to the market in 2016,” Patel said by phone. “If sentiment continues to sour, we might see a deteriorating stock performance across different sectors.”

World Equity Index Rankings YTD
World Equity Index Rankings YTD

Analysts are predicting that the rallies in TAL Education and New Oriental Education will soon run out of steam. Median target prices imply a 4.3 percent appreciation for New Oriental Education and a 0.8 advance for TAL Education in the next 12 months, data compiled by Bloomberg show. Forecasts for Alibaba and Baidu see each gaining at least 22 percent.

“Both education and consumer spending are high priority in China, but consumer companies are being punished amid concern over growth deceleration, and education stocks have been rewarded,” Henry Guo, a New York-based analyst at M Science, said by phone. “This doesn’t meant that investors think a consumer story in China is over. We might see investors flocking to some of China’s biggest online names as the sentiment on China turns around.”

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