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New Oriental Education
19 July 2021

New Oriental Education & Technology Group (EDU)

EDU is a large-scale leading provider of private tutoring in China, that offer services both offline and online. In a country where education is one of the main keys to social mobility, Chinese parents are often willing to pay more on their children’s private tutoring to improve their performance in public examinations. This has encouraged the development of the world’s leading market in After School Tutoring (AST).
A recent survey shows that Children’s education continues to be a top financial priority for families in China.

The market for AST in China is forecasted to grow to $168bln by 2024, representing a 16% CAGR from 2020 levels as penetration rates increase, and online learnings makes AST more accessible to Chinese communities. Student growth is set to reach 659mln by 2023, a 19.3% CAGR from 2020. As the Chinese begin to loosen their child policy from 1 to 3, the demographic dividend is likely to be a tail wind for AST for decades to come with EDU just scratching the surface!

The marketplace remains fragmented with the top 2 players only commanding 3% of the market. At present EDU accounts for just 1.8% of the nation’s AST market.

Over the last 3 years EDU has grown enrollments by 30% and revenues by 25% Y/Y. A current target is the expansion of its school network by 20-25%, as well as grow its net revenue by 26% over the next 5 years.

The stock has fallen 65% since February 2021 as regulatory concerns resurfaced. We believe that the current market price has already discounted the most stringent regulations which we see as an unlikely case. This pull back has created a tremendous opportunity for us to take a position in a company that is at the forefront of an industry, with the prospects of incredible and sustainable secular growth at significantly discounted levels.
We are confident that EDU is well positioned to withstand the uncertainty regarding the regulations, as these are essentially targeted at protecting children and preventing the smaller less-known education facilities from taking advantage of education-eager parents and children. In fact, EDU stands to gain market share and benefit from these regulations as the smaller players leave the market. Consequently, it will strengthen its dominant position as a well-established private educational-services provider.

New Oriental has been aware of the possible regulation changes since 2018; they have made the necessary changes and continue to engage with their PRC legal counsel. These regulations include:

  • Limiting the collection of fees to no more than 3 months in advance.
  • Increasing the regulation requirements for the acquisition and expansion of learning centres.
  • Teachers are also expected to complete additional teaching certifications.
  • Kindergartens and K-9 classes must be completed before a predetermined time and no homework can be assigned.

All these regulations are put in place to foster a positive environment to improve the education standards and enhance teaching quality.

From a valuation perspective, EDU has historically traded at a 40x PE multiple, a high multiple but justified given its growth and the growth of the sector in general. Given the current headline regulatory risk, this stock is currently trading at a PE multiple of 15x. We expect EDU’s profit to continue to grow on the back of solid revenue growth and improving margins.

Revenues of New Oriental Education and Technology Group from fiscal year 2010 to 2020 (in million U.S dollars)