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New Oriental Education (NYSE:EDU) is an education company in the People’s Republic of China which offers private tutoring services, test preparation classes and other education-related services. Back in 2020 when regulatory authorities cracked down on the practice of for-profit tutoring, most companies associated with this field took a sharp nose dive of over 90% and have struggled to recover since.
After further fears of delisting on US-based exchanges, the company’s stock cratered and spent an awful long time at the bottom of the barrel. But recently, however, the company was nearly alone in surging about 250% from its lows after it appeared that the company is the best positioning for a post-regulatory era in the People’s Republic of China’s private education world.
Why They’re Different, After All
An initial review of the company has me puzzled as to the 250% share price gain relative to muted results among the company’s closest competitors, most notably TAL Education Group (TAL). There are a few metrics which I’ll use in order to evaluate the long-term prospects of the company to determine which is better positioned:
Revenues: Since the regulatory bans took effect, all companies in the field have been projected to lose revenues given the changes necessary to remain compliant with the new regulations. But relative to TAL Education Group, it’s clear that New Oriental Education got hurt far more, so far.
From 2021 to 2022, when the regulations began taking effect, New Oriental Education Group shed 27.4% of sales, declining from $4.3 billion to $3.1 billion. During the same time period, TAL Education group shed 2.3% of sales, declining from $4.5 billion to $4.4 billion, a fraction of the decline of New Oriental Education.
However, this was mostly due to the company preemptively shedding its k-12 tutoring program to save cash moving forward and invest in its faster-growing alternative business segments, something which appears to have paid off.
Future Revenues: When it comes to future revenue drop-offs, there’s some happy news for New Oriental Education investors, where the company is projected to report just a 25% decrease in sales for 2022, down to $2.35 billion. On the other hand, TAL Education Group is expected to shed almost 79% of revenues in the upcoming year, down to below the coveted $1 billion.
Looking ahead beyond this upcoming fiscal year, the companies are expected to report the following growth rates for 2023 and 2024:
| 2022 | 2023 | 2024 | |
| EDU | $2.35 billion | $2.52 billion | $2.97 billion |
| -24.3% | +7.25% | +17.6% | |
| TAL | $964 million | $1.16 billion | $1.31 billion |
| -78.0% | +19.9% | +13.5% |
(Source: Seeking Alpha Earnings Projections – EDU & TAL)
So, at the end of the day, this is where most of the company’s clout comes from as both companies starting revenues of around $4.45 billion end up with New Oriental Education & Technology Group at more than double the revenue of TAL Education Group by the end of 2024, according to analyst projections.
Financial Health: From a financial health perspective, there are several factors I like to look at to determine the long-term viability of the companies. New Oriental Education has just shy of $1.2 billion in cash and equivalents as well as just over $3 billion in short-term investments it’s using to expand its offerings and mitigate interest payments. Given that the company is going to see cash burn rate that’s higher than historical average given the new regulatory environment and the need to effectively market their programs that work under that platform, it’s good that they have a high level of liquidity.
The company has also paid off almost $250 million in long-term debt last year and now holds only $65 million in debt, on which they pay only $6.7 million annually in interest expense. But that’s when the aforementioned cash and short-term investment come in – the company generated $141 million in interest income, which more than offsets their $6.7 million interest payment.
Bad Present, Decent Future
You can read my previous article, which you can find here, if you want to read up on the company’s business model and such, I’ll spare you those details here again. However, it’s clear from the information above that although the company saw a larger drop in revenues last year than its closest competitors, they have positioned themselves much better than others in the space to shift their resources into day classes and adult education services, which don’t fall under the umbrella of the regulatory bans put in place by regulatory agencies.
As the company refocused their efforts, it’s becoming apparent that they’re likely to win the future fight, for now, on market share capture in the shrinking private education market after the regulatory reform in China. This has been a common theme from recent investment banks’ ratings changes, which is a big part of why the company’s share price has taken off in the past few weeks and months.
Overseas Expansion
A big part of my optimism for the future of the company and the industry is not only the refocusing on after-school and adult education within the People’s Republic of China, but also their overseas expansion efforts.
The company’s revenues from overseas after-school education segments expanded significantly in the company’s most recent reporting quarter. This is critical at replacing revenue sources within China with surrounding countries which are becoming more and more of economic powerhouses as time goes by. Getting an early start in these countries is critical for the long-term success of New Oriental Education and capturing market share before both other Chinese companies as well as local ones emerge on the scene.
The company reports these in 2 segments, with the overseas test preparation segment up by 6% compared to the same quarter last year and the overseas studies consulting business up 16% compared to the same quarter last year. The company leveraging their knowledge of years of operating in the world’s most populous country will become invaluable as developing and emerging nations in the Asia-Pacific and Middle Eastern regions seek to develop similar programs to boost education standards and performance.
Investment Conclusion
Although on the surface, New Oriental Education has, thus far, performed worse than its peers when it comes to revenue declines, their long-term planning is superior, and I believe they are set to outperform expectations.
As a result, even though the company’s share price has risen over 250% since its lows earlier this year, I believe that an investment in the company will easily outperform both peers and the market as a hold, and it constitutes exposure to the Chinese economy without direct risks of their economy, since it relies both on education, which rarely sees funding decline, and overseas consulting and test-prep services, which also rarely get slashed.
Overall, I retain my bullish stance on New Oriental Education & Technology.
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