Since December 15, shares of TAL Education Group, a Chinese private education service, have risen 57%. Buying is on the upside, but no corporate news. We’re figuring out if this stock is worth holding.
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Back in February 2021, TAL Education’s share price was above $90 per share. But in the months that followed, the paper plummeted following the introduction of private education regulatory requirements in the PRC. As noted, the new regulations prohibit companies that teach school programs from making a profit, raising capital, or conducting an IPO. Some stock exchanges have even warned of the risk of delisting against this backdrop.
In March 2022, TAL stock was down as low as $1.6. The rebound from the low base was substantial, but for investors holding the stock before the collapse, it’s still modest.
Reasons for the rebound
We saw a technical rebound from the lows in the summer, but in October the stock has already fallen twice from the August highs. The current growth wave correlates with the market-wide recovery of the Chinese market that started in November against the background of the fundamentally low valuations, prospects of easing restrictions caused by the pandemic, and government support for certain sectors of the economy.
There is also a general positive for Chinese securities traded in the U.S. regarding the reduced threat of delisting. The U.S. Public Company Accounting Oversight Board (PCAOB) said it had access to a review of audit documents for the first time during its recent examination of Chinese companies listed on U.S. exchanges.
UBS — on Nov. 3 upgraded its recommendation from “Hold” to “Buy,” with a target price of $6.5
Bank of America on October 31 upgraded its recommendation from “Sell” to “Hold” with a target price of $4.7.
The stock has recently hit $9, which is seriously above the estimates, and the consensus estimate, which is now at $6.
What to do with the stock
TAL’s revenues are down 80% year-over-year and are unlikely to return to previous levels soon, given changes in legislation in the education sector in China. Given that TAL stock is already well above target prices from brokerage houses, and the fact that no positive news on the company has been published, new buying looks like a very risky investment.
It might even be a good time to close out losing positions in the paper if they have been held from high levels. When the fundamentals and the rules of the game for business change, it is hard to count on a recovery to the former highs. The example of U.S. Citigroup shows that the price for many years can remain many times below previous levels.