China Education Stocks on Uptrend - UBS Says Gains Will Last

Chinese education will withstand salary cutbacks and global epidemics alike, UBS analysts say.

Author: Anna Vodopyanova   

Chinese education stocks are on a roll lately, especially those that are taking strides in digitization – and those seeing recovery this month from the Covid-19 shutdowns.

Look at large private educator New Oriental Education & Technology Group (NYSE: EDU). Its stock, up more than 2% today, dropped to $100 in March and April. It is now trading higher than its pre-epidemic level, at $144.44 per share. Its smaller rival, Puxin Ltd. (NYSE: NEW) jumped from $4.03 in April to today's $9.42 per share. NEW was trading 5% higher today from Tuesday's close.

Among digital learning stocks, Youdao Inc. (NYSE: DAO) is a big gainer. It is trading today at $38.70 per American depositary share – more than double its January level. The stock is among the newest of Chinese educators to IPO in New York – in October 2019, it began near $12.50 per share, lower than its issue price of $17. Backing by China tech giant NetEase (Nasdaq: NTES; HKEX: 09999) and strong first-quarter revenue, however, lifted DAO in the eyes of the investors and analysts. A median 12-month price target from 10 analysts surveyed by CNN Business was $238.07 per share. That's about $200 more than DAO's per-share value today.

In a July 6 research report, UBS Group looked at the changes in China's consumer behavior. While less Chinese expect salary raises this year, 77% of those surveyed are ready to spend on higher-quality products and more than 50% would choose education and sports spending over goods, according to the report.

UBS called education among the sectors resilient against the changes in household income. This month, it expects most offline educators to recover from first-quarter declines. UBS also named TAL Education Group (NYSE: TAL) and Koolearn Technology Holding Ltd. (HKEX: 01797) as the "post Covid-19 recovery – most favored" stocks of the education segment.

Afterschool education provider TAL was trading 3% higher Wednesday, at $74.05 per ADS – compare that to its $50 per share value in March and January 2020. Koolearn, another online learning provider, closed up 7% in Hong Kong Wednesday, at HK$41.80 per share. That's also it's highest level in six months.

"Online education traffic was significantly boosted during COVID-19 and we expect at least part of this traffic to stay," UBS analysts wrote in the report. Further, the second half of 2020 will present opportunities for online educators to turn user growth to monetization. UBS added that it expects education to continue to shift online, "creating substantial addressable market upsides."

Chinese education providers that may be called solid stocks under $5 are language learning platform LAIX Inc. (NYSE: LAIX), up 7% today, at $2.90 per share, and Zhongchao Inc. (Nasdaq: ZCMD) – a medical learning provider, up 3% Wednesday, at $2.54 per share.

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