Some recent articles on this company which I don't talk about enough...
Via Forbes:
- With a growing number of Chinese students taking English tests to study abroad, New Oriental Education on Monday posted a 55% jump in net profit for the quarter ending in August.
- New Oriental reported net revenue for its first quarter increased 42.5% to 612 million yuan ($81 million) from the corresponding period last year. Net income rose 55.1% to 256 million yuan ($33.9 million). Basic earnings per ADS were 6.86 yuan ($0.91).
- Chairman and Chief Executive Officer Michael Minhong Yu said the first fiscal quarter is most important to the company, as it includes the two-month summer holiday, during which many Chinese students have to prepare for language tests.
- “This summer we exceeded 440,500 student enrollments in our language training and test preparation courses, a 30% increase over the same period last year,'' Yu said. It expanded its number of locations, opening two schools and 17 learning centers, bringing its total numbers to 149 schools and learning centers, up from 115 a year ago.
- Looking ahead, New Oriental Education expects its total net revenues in the second quarter of fiscal to be in the range of 211.2 million yuan to 224.8 million yuan ($28 million to $29.8 million), about 25%-33% higher than previous year.
- New Oriental is the largest provider of private educational services in China in terms of program numbers, total student enrollments and geographic reach. It enjoys a near-monopoly on prep services for language and entrance exams used in the United States, including the Test of English as a Foreign Language (TOEFL), the Scholastic Aptitude Test used to qualify for undergraduate programs and the Graduate Management Admission Test, required of business school applicants.
- Rapid growth in China's economy has providers scrambling to keep up with the increasing demand for educational services. To accommodate the demand, New Oriental opened two new schools and 17 learning centers and initiated a new mathematics program. The company is also seeking opportunities to expand into new areas such as vocational schooling and kindergarten classes by using some of the cash raised from the secondary offering.
- To buck the rising competition, the company has aggressively tried to continue winning additional market share. Last quarter, selling, general, and administrative costs (SG&A) rose substantially as management stepped up marketing and promotional activities, which paid off with enrollment rates increasing 30.5% year over year. Costs continued to rapidly rise again this quarter, with cost of goods sold up 48% and SG&A costs up 42%, because of New Oriental increasing the number of courses taken and continuing brand promotion.
- Despite the rising costs, New Oriental still improved its operating margin through better efficiency as revenue growth outpaced the growth in expenses.
- There are more than 10 million students who take the Gaokao (Chinese SATs) every year, fighting for a mere 3 million spaces available in universities, so the rivalry among students is fierce. Students and their parents seem more than willing to shell out the additional costs to gain an edge, even at a young age. And the hard work pays off: The number of just the top 25% of people, according to IQ tests, in China is greater than the total population of North America.
Takeaway: I really love this company and its done good for me since it's been public. While it is extremely expensive (to me), compared to the absolute junk that speculators have been pushing up 50-300% (what it has China in it's company name? Must be worth 200% higher!) it's a heck of a franchise. At this point it is very difficult to value these companies because investors are not valuing them on normal metrics - essentially every company is China is based on the calculation "company's product x 1.3 billion people = limitless profits for ever and ever". Obviously that is ridiculous but that's the psychology of this sector in the past 8 weeks or so. Out of these 100s of Chinese stocks there will be clear winners/leaders in the long run, but trying to identify which will be the winners out of the mountains of Chinese issues is the tricky part.
I read last night that 78 Chinese IPOs hit the world markets last quarter alone (in various exchanges) - so you can see the same thing that was happening in the late 90s in tech stocks. Any and all companies were rushing to the market, regardless of quality, to take advantage of the 'gold rush' mentality. Back then if you had .com at the end of your company name you had 'limitless' profit opportunity. So replace the word 'China" with '.com' and replace '1.3 billion' with 'number of eyeballs' and it's the same mania, with the same ending (eventually). Once again, this is not saying anything negative about the Chinese economy and the powerhouse it is becoming - there is a difference between that and saying any company that sprouts in China and comes public is the heir apparent for world domination. But investors don't care right now, and all merchandise in China is worth multiples of multiples because of unending profit potential. I keep going back to China Mobile (CHL) which has nearly 400 million subscribers. How many China Mobiles could there be in China? Answer - at most 3. And that's if China Mobile itself decides it doesn't want to grow any more. 400 million x 3 = 1.2 billion people. So the company if it had a virtual monopoly could double twice from here - then what? And how are all these "me too" 'cell phone' companies investors are clamoring over also going to grow to 200 million subscribers? I am using 1 sector as an example but it applies to any sector. Again, the economic growth is real but the math right now is unrealistic. Every company in every sector cannot grow to 1.3 billion customers. But as with all mania's play it until the music ends; but I am trying to stick to the high quality names.
As an aside I also took a bit off Ctrip.com (CTRP) since it spiked today as well. You know 1.3 billion people x airline ticket to Shanghai or Macau = limitless profits.
Long New Oriental Education, Ctrip.com in fund; no personal position
