Why Shares of KE Holdings, TAL Education Group, and New Oriental Education Are Falling

What happened

Many Chinese stocks trading on U.S. stock exchanges took a hit Monday, as regulators in China imposed fines on two Chinese companies and as fears over COVID-19 resurfaced in several Chinese cities.

Shares of the Chinese real estate platform KE Holdings (BEKE -1.13%) traded more than 10% down as of 11:47 a.m. ET today. Shares of New Oriental Education & Technology Group (EDU 1.46%) were down nearly 9%, and shares of TAL Education Group (TAL 0.25%) dropped roughly 10%.

So what

Last year, the Chinese government was very restrictive on Chinese tech stocks, imposing large fines, launching investigations, and even removing some apps from domestic app stores. In recent months, the Chinese government has started to ease its stance and be more supportive of the sector in an attempt to boost economic growth in the country.

Image source: Getty Images.

But recently, China’s State Administration for Market Regulation fined the large Chinese commerce company Alibaba (BABA -1.27%) and the entertainment company Tencent (TCEHY -0.48%) for improperly notifying regulators of past deals, suggesting Chinese tech companies could still see regulatory headwinds.

“The latest selloff is triggered by the news of fresh fines on anti-monopolistic practices in the sector,” Justin Tang of United First Partners, an investment research company, said to Bloomberg. “The world is not out of the woods yet and we will continue to see volatile movement in stocks as a general rule of thumb.”

In other news, China is seeing a resurgence of coronavirus cases after imposing major lockdowns during the past few months. Authorities have found new cases of the omicron subvariant that has become the dominant form of COVID-19 in the U.S. and is extremely contagious. And the Chinese government said yesterday it detected the first case of a new omicron subvariant in Shanghai.

Now investors are worried that lockdown protocols, which have significantly cut into economic growth projections, could be making a return.

The region of Macau over the weekend closed non-essential businesses for a week, and 11 cities in China are now in at least partial lockdowns, with some having to undergo full lockdowns. The Chinese government had been targeting 5.5% gross domestic product (GDP) growth in 2022, but the World Bank revised its projection down and now expects only 4.3% growth. Further lockdowns could bring that number lower.

Now what

Over the past year, like many Chinese stocks, these three stocks have been pummeled. KE Holdings is down more than 60%, New Oriental Education is down more than 66%, and TAL Education Group is down more than 79%. But they all still trade at very high earnings multiples.

These stocks all have huge potential given the massive opportunity in the market they operate in, but the stretched valuations of growth companies are not exactly enticing in the current environment. There could also be more economic pain in China this year and more regulatory headwinds as well, despite the friendlier attitude Chinese regulators have shown for most of the year.

Ultimately, there may be opportunities in this sector, but expect lots of volatility along the way, and be sure you can take a long-term investing approach.