(Bloomberg) — A battered Chinese education stock became a hedge fund investment darling, soaring 380% since its March-low.

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New Oriental Education & Technology Group Inc. could see another 50% upside in price in the next 12 month, according to a January newsletter by Singapore-based FengHe Fund Management Pte, one of several hedge funds that bought into the company’s US-traded shares.

Hedge funds now have become one of the biggest investor groups of New Oriental — some 36% of publicly disclosed American Depository Receipts of the company were controlled by such investors in December, up from less than 5.6% in October 2021, according to data compiled by Bloomberg. The hedge funds were initially attracted by the cheap valuation, and bet on the Beijing-based company’s ability to win market share and pricing power after smaller competitors retreated.

Seth Klarman’s Baupost Group LLC also bought the company’s stock last year, joining FengHe as top holders of New Oriental at year-end, the data showed.

When Beijing clamped down on after-school tutoring services, New Oriental lost about 96% of its value amid the broader decimation of publicly traded education-technology stocks.

Baupost retained a stake worth $242 million at the end of last year, making it the third-largest holder of the ADRs, according to data compiled by Bloomberg.

FengHe was fourth, with a $228 million stake. The stock has been the top-performing position of its hedge fund in recent months, Chief Investment Officer Matt Hu wrote in a January newsletter. Last month, when the fund gained 7.4% after fees, the position alone boosted fund value by 1.7%.

“We are confident in continuing to hold the remaining stake among our top five long positions,” Hu wrote.

A Baupost spokeswoman declined to comment. Hu did not reply to e-mails seeking comment.

Past Clampdown

A 2021 ban prevented after-school tutoring services providers from generating profit by offering classes related to China’s compulsory education curriculum from kindergarten to ninth grade.

In one sign of how far the industry fell out of favor, an unidentified education company in Beijing attracted just eight attendees for its shareholder meeting in late 2021, “unimaginable” only a year earlier, according to a June social media post by Greater China-focused hedge fund manager Golden Pine Asset Management.

Since then, interest has picked up. Baupost disclosed an eight-million ADR holding as early as the second quarter of 2022, paring it back by nearly 28% by year-end. Based on average closing prices of those periods, it could be sitting on more than $150 million of realized and paper gains. FengHe bought 6.2 million ADRs in the third quarter, according to filings.

Triata China Equity Master Fund, led by Shenzhen-based Sean Ho, started its bullish bet on New Oriental in the second half of 2021 and added more shares in March, according to a December newsletter.

Even after the rebound, New Oriental ADRs are still trading at about a fifth of its February 2021 peak. While the easy gains from a stock trading below its cash value may now be over, some investors are willing to bet the rally is sustainable.

New Frontiers

New Oriental’s test and English language preparation, book publishing, and corporate training businesses remain unaffected, Ho says, despite the regulatory overhaul wiping out about 50% of its revenue. The firm’s management has paid off all its accounts receivables, started a live-streaming e-commerce business, and shifted the focus of its education segment to non-school curriculum subjects and 10th to 12th grades, he said. It now offers a range of hobby group sessions, ranging from music to chess, calligraphy and dance classes. It’s also been able to charge higher rates than competitors, he said.

The market under-appreciated the long-term potential of such non-school curriculum offerings, Ho wrote in the newsletter. Ho declined to say whether Triata still holds the stock.

New Oriental’s profits can grow in excess of 20% a year, a rarity in China today, FengHe’s Hu wrote.

Among the drivers is its stake in Hong Kong-listed Koolearn Technology Holding Ltd., an online provider of extracurricular education services, which also runs a live-streaming e-commerce operation.

New Oriental didn’t respond to an email seeking comment.

FengHe halved its stake in recent months to limit the position’s size relative to the fund’s overall investments as prices jumped, Hu wrote. Still, if New Oriental were to go public today, “I would still be willing to buy in, based on the calculated upside potential,” he said.

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