New Oriental Is on Track for Big Dividends Despite Some Troubling Details in Its Bottom Line
In its most recent quarterly report, Chinese tutoring giant New Oriental Education & Technology (NYSE: EDU) showed a troubling sluggishness in earnings growth. Revenues were up for the quarter ended Aug. 31 by 24 percent, but earnings per share grew at barely half that rate – "never an encouraging sign for those watching on Wall Street," noted Brian Stoffel, an analyst for the website The Motley Fool.
A more than cursory look at New Oriental's metrics, however, shows that the company, far from floundering, appears to be setting itself up for a profitable future, Stoffel and other analysts have suggested.
For leaders in the field, the K-12 education sector is booming, propelled by the middle-class aspirations of China's labor force whose members generally view education for their children as the key to economic stability and family welfare. Such aspirations are a growing factor in China's economy as the middle class grows, studies have shown.
And grow it will. A recent McKinsey & Co. study says that 550 million people will be considered middle class by 2022. In 2000, only 4 percent of the China's urban population was considered middle class.
"China's middle class is on fire," says Business Insider.
Not coincidentally, the expansion of the middle class has been accompanied by a "dramatic" increase in disposable income in China's major cities, according to 86Research analyst Yuzhong Gao, talking with Investor's Business Daily. Much of that income is finding its way into education programs for primary-school students, the progeny of a population boom dating back almost a decade.
The exemplars of the spreading success-through-education mentality could be New Oriental's own expanding clientele. The company boasts that it has signed up 4.9 million clients in fiscal year 2017. These were school-age students in tutorial programs or adult students using the company's online services.
The "key revenue driver" has been K-12 after-school programs, Yang says. The company plans to add 10 to 15 percent new K-12 learning centers in cities where the company is already established, as well as expanding in up to four new cities and into rural areas.
The dividends from K-12 programs show why there has been a big expansion. Revenue from the company's three main after-school tutoring programs – including programs designed for elementary-school, middle-school and high-school students – all increased 35 percent or more during the most recent quarter.
One factor in the slow growth of earnings this year was a highly successful summer promotion to expose would-be new students to New Oriental programs.
"We carried out a large-scale summer promotion this quarter by offering low-cost trial courses for multiple subjects in 38 cities mainly targeting students before they start the first secondary school year," said CEO Chenggang Zhou. "Trial course enrollments during the period reached 554,000, more than doubling year-over-year, and student retention rose year-over-year as well."
New Oriental started out focused mainly on preparing college students for admission to foreign colleges and universities. But the K-12 business soon offered more profitability.
At the same time as K-12 programs were powering up an ambitious facilities expansion program was underway. New Oriental increased its number of schools and learning centers by 17 percent in the quarter.
These were not minimal plant additions. "The total square meters of classroom area by end of this quarter increased approximately 31.4 percent year over year," Zhou said.
In its quarterly report, New Oriental sums up its widening footprint this way: "As of August 31, 2017, we had a network of 78 schools, 899 learning centers, 20 bookstores and access to a nationwide network of online and offline bookstores through 170 third-party distributors and over 23,200 teachers in 66 cities, as well as an online network with approximately 18 million registered users."
A byproduct of the recent expansion – both in terms of space and enrollment – has been a temporary loss of revenue, the company notes.
But New Oriental is expecting eventual big pay-offs. CFO Stephen Zhihui Yang said in a press release: "Our expansion strategy and the recent incentives should drive additional revenue growth and market share in the long run."
In its 24 years of existence, New Oriental has overcome some major bumps in the road. For example, in 2016, company stock plummeted when Reuters reported that eight current and former employees claims that the company was writing student essays for college applications and falsified teacher recommendations and high school transcripts. New Oriental had contracted with various America universities to help in recruiting foreign students for American colleges. The company denied the charges, which were never confirmed by agencies that monitor education programs.
New Oriental stock fell more than 14 percent on NYSE. But it soon recovered. EDU stock now trades around $90, though it has reached almost $95 recently.
In recent years, the company has taken steps to centralize control over its sprawling empire, replacing headmasters who were not responsive to orders from headquarters in Beijing, according to Investor's Business Daily.
"By doing that it has been very successful," Gao told the magazaine. The result has been "a more centralized control over its [the company's] local schools" and "management efficiency, which translates into improvements in every aspect."
Company officials say their current expansion program does not include plans to buy up other tutoring services. Analysts say that expansion is more likely to come the old-fashioned way: by building new facilities and programs in new cities.
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