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TAL Education Extends Sharp Losses on China Private Tutoring Crackdown

Analysts downgrade TAL Education following China's crackdown on private education companies.
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TAL Education  (TAL)  and other private education companies tumbled Monday after Chinese regulators announced an overhaul of its education sector that bans firms that teach school subjects from making profits, raising capital or going public.

TAL was down 26% to $4.42 on Monday, while New Oriental Education and Technology Group  (EDU)  sank 24.4% to $2.21, and Gaotu Techedu  (GOTU)  was down 22%.

News of the government's plans surfaced on Friday and stocks began their fall.

The policy change also restricts foreign investment in China's $120 billion private tutoring sector through mergers and acquisitions, franchises, or variable interest entity arrangements.

Analysts reacted swiftly to the announcement. Goldman Sachs analyst Christine Chao said in a research note that "we see scope for significant implications to the industry structure and profit pool for China’s K-12 after-school tutoring sector."

Chao downgraded TAL and New Oriental to neutral from buy and Gaotu to sell from neutral.

"We expect China’s AST industry TAM (total addressable market) to shrink significantly in 2021E-23E on the newly issued reform measures and see structural headwinds limiting modest growth from 2024E onwards," she said, referring to after-school tutoring.

CLSA analyst Jeffrey Chan downgraded TAL Education to underperform from buy with a price target of $6, down from $55. 

China's finalized "Double Reduction" document was officially released and "very strict rules" are applied to the entire after-school tutoring segment, Chan said, according to the Fly. Under the current regulatory environment, he said, there is "too much uncertainty for us to make a compelling valuation argument."

Bank of America analyst Lucy Yu downgraded TAL to underperform from buy and New Oriental to buy from neutral. 

"Though companies could increase utilization during weekdays to offset some pressure, we believe it is likely for these companies to be loss-making under the policy considering huge operating deleverage on fixed costs (teacher and rental)," she said.

Benchmark analyst Fawne Jiang downgraded TAL Education to hold from buy with no price target. The analyst said she expects the government's actions "will have a profound impact and adversely change the financial outlook of the industry." 

Though TAL has a large cash balance and capacity and capability to pivot into permissible new businesses which will "likely make it a survivor," Jiang said her downgrade reflects limited visibility on the industry landscape post the reset.