Tal Education, Gaotu drop quickly after cut to sell at Citi after new Xi comments

  • Tal Education and Gaotu Techedu were cut to sell at Citi after some new comments from Chinese President Xi Jinping.
  • Xi reportedly said in a new report from Xinhua Net that “students should not rely for their studies on after-school tutoring,” according to Citi.
  • Tal Education fell 6% and Gaotu dropped 11.4%. Tal Education cut to sell from neutral, PT reduced to $28, while Gaotu’s was double downgraded to sell from buy and its PT was cut to $12.

  • The new comments indicate the Chinese government’s “resolution” to tighten the AST sector, Citi analyst Mark Li wrote in note. Potential regulations may include possible AST “control” on weekend and holidays, ban of advertising for online/offline AST and possible control on pricing/tuition fees.
    Li sees potential downside risk for most of the after-school tutoring companies’ sales and “especially profitability.”
  • Li keeps buy rating on New Oriental given its exposure to non-K12 tutoring. New Oriental fell 1.7%. Gaotu short interest 13% of float.
  • The Citi note comes a day after shares of the tutoring companies’ gained after some new government comments about potential education reforms were made that appeared more positive. UBS analyst Felix Liu yesterday wrote that a total ban on after school tutoring appeared to be less likely.

Author: Josh Fineman, Seeking Alpha

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