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Saturday, December 16, 2006

Looking at New Oriental Education & Technology Group (EDU)

Net Oriental Education & Technology Group is an ADR trading on the New York Stock Exchange. The business is located in Beijing, China. They are primarily a school for teaching English within China. I've heard people claim that there are more English speaking people in China than the US, although I'm not sure if that's particuarly accurate (how about fluent English speakers?). I'm not looking at this as an investment; it's too overpriced. I'm looking at it in relation to China Education Alliance.

Yahoo, Google, SEC, English website

Prospectus:
Largest education services provider in China. 3 million enrollments since 1993. 872K in 2006. 375K are in test preparation courses. 25 schools and 111 learning centers. 1,700 teachers. 2 million registered online users. Recent CAGR growth is 32%.

The schools stretch from Shenzhen in the south all the way to Harbin in the north and out to Chengdu, Sichuan in the west (Chengdu and apparently Chongqing as well, buried in the notes). Nothing in Fujian or Jiangxi in the south.

They also cover test preparation courses (which is CEDA's line of business). Also online education.

Classes for kids age 5 up to adults.

The total available market was about $72 billion in 2004 (English language training was only $1.9 billion of that). EDU's total revenues for 2006 were only $96 million. So it's apparently very fragmented, which is good for CEDA. 2/3 of EDU's revenues are in four cities: Beijing, Shanghai, Guangzhou, and Wuhan (each has more than 4 million people).
The private education sector in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this sector to persist and intensify. We face competition in each major program we offer and each geographic market in which we operate. None of our competitors focuses on as broad a spectrum of programs, products and services as we provide. Instead, our competitors focus on targeted markets, both in terms of the particular segments of students they aim to attract and the local markets in which they operate.

For example, we face nationwide competition for our IELTS preparation courses from Global IELTS School, which offers IELTS preparation courses in many cities in China. We face regional competition for our English for children program from several competitors that focus on children’s English language training in specific regions, including English First. We face competition for our “Elite English” program primarily from Wall Street Institute and English First, both of which offer English language training courses for adults in many cities in China. Wall Street Institute began providing high-end English language training courses to adults in major cities several years before we entered this market and enjoys a first-mover advantage. We also face limited competition from many competitors that focus on providing international and/or PRC test preparation courses in specific geographic markets in China.
EDU's goals are to establish more schools and training centers, increase enrollment, expand offerings, and do misc strategic stuff.

Financial results for year ending May 31, 2005: (2006 results are skewed by a giant share compensation expense)
Operating margin: 17% (CEDA is 54%)
Net margin: 22% (CEDA is 54%, no tax)
Net return on assets: roughly 13% (CEDA is 44%)

Language training and test preparation revenues increased by 16% in 2006 and 39%. in 2005.

1 school, 1 training center, and 1 bookstore in Harbin.
2 schools, 28 learning centers, and 1 bookstore in Beijing.

They offer courses in thse PRC admissions tests: CET 4, CET 6, National English Test for Entrance into Master’s Degree Programs, National Math Test for Entrance of Master’s Degree Programs, Professional Title English Test and Public English Test System

They offer courses in overseas exams: TOEFL, TSE, SAT, ACT, IELTS, GRE, GMAT, LSAT, BEC and TOEIC

Class sizes are 50 to 500 students. 20 to 160 hour programs. Classes meet 1 to 4 times per week, typically 2.5 hours per class.

Course fees range from roughly $20 to $3,000.


CONCLUSION

The margins and return on assets for CEDA and EDU are very different. For one thing, it's fairly clear that CEDA is running cheap. They don't have a lot of assets and they have a long depreciation schedule. EDU seems to me to be like a typical western business with expensive assets (more than a building with 10 home theater units depreciating over 10 years).

And it's not like CEDA has a low growth rate. I get the sense that if fancy big-city education companies like EDU make big inroads into the Harbin area, that CEDA will probably get their margins squeezed somewhat, either forcing them to upgrade their assets or lower their prices to compete. But there's lots of room for that when the time comes.

Comments:
Hi...

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