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New Oriental Education is a Hidden Gem

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eduation(Sept. 14, 2009) New Oriental Education and Technology Group Inc. (the "Company") (NYSE: EDU), is the largest provider of private educational services in China. It was established in 1993 and went public at September 6th, 2006, and now New Oriental Education & Tech. Group Inc is running 273,055,000 ADSs at $72.85due on September 11, 2009, 9:24 a.m.

* Revenue/Earnings Growth

In the past ten years, following by China’s Reform and Open, China has been connected to the world and been influenced by globalization. English has become very important for most of Chinese. Therefore, the service New Oriental provides exactly meets market needs for English and other foreign language trainings. Total student enrolments in language training and test preparation courses increased dramatically in the past few years. 

Annual data show that New Oriental’s revenue increased significantly from 2006 to 2009 (accounting year ending at May 31st).

EDU_09Q2_1

Annual Revenue in Millions of USD (Google Finance, 2009)

On the other hand, data displays that New Oriental’s quaterly revenue floated frequently through the past few yeasr. But there are two obvious increase in quarterly revenue happened every fisical quarter ending at 31 August and 28 Februry. This phenomenon is quiet interesting and relative to the nature of this company—a private education instituion providing foreigh language studying courses for mainly students.

Chinese students have two holidays: summer holiday from the end of July to the end of August, and winter holiday from January to Febrary. During these two holidays, plenty of students choose to take a language learning program in New Oriental. Moreover, since summer holiday is longer, more students tend to participate in summer. Therefore, there are two obvious revenue increasing in each year, and the summer revenue is bigger than the winter revenue.

EDU_09Q2_2

Quarterly Revenue in Millions of USD (Google Finance, 2009)

New Oriental’s Net Income from 2005 to 2009 was presented in next graph. This graph illustrates that New Oriental was in a rapidly growth period during the past four years, however, grow at a decreasing rate since 2008.

EDU_09Q2_3

New Income in Millions of USD from 2005 to 2009 (Google Finance, 2009)

As a young company which has run no more than 15 years and gone public no more than 5 years, New Oriental apparently is at growth age during its life span. The specific characteristic of growth period in a company’s life span decides that:

1. New Oriental will keep doing quite well in future until it enters its mature and finally decline period;

2. This company will less likely suddenly collapse in future. If the required rate of return keeps constant, growing revenue and earnings will significantly push the company's stock to keep in increasing.

* Cash flow

The company’s cash flow statement displays that Cash from Operating Activities increased steadily from 2005 to 2008.

EDU_09Q2_4

Cash from Operating Activities in Millions of USD (Google Finance, 2009)

Moreover, the cash spend on investment had been decreasing until 2008 when the company invested around 59.77 million of USD.

In Millions of USD (except for per share items)

12 months ending 2005-05-31

12 months ending 2006-05-31

12 months ending 2007-05-31

12 months ending 2008-05-31

Cash from Investing Activities

-43.72

-17.21

-12.29

-59.77

Financing Cash Flow Items

0.01

0

0.29

-0.27

Total Cash Dividends Paid

-9.59

-9.48

0

0

Issuance (Retirement) of Stock, Net

26.9

1.48

168.81

-18.99

Issuance (Retirement) of Debt, Net

21.37

-15.49

-27.16

0

In 2008, after going public and generating 168.78 million US dollars in 2007, New Oriental repurchased 18.99 million US dollar its own shares. This could be seen as a strong signal by the market, as usually manager repurchase shares when they believe the stock was undervalued and will increase in future.

Moreover, the balance sheet shows that New Oriental repurchased those shares using its previous retained earnings instead of loans. The cash in its balance sheet was $314.62 million while its total debt was 0 as of 31 May 2009. In my opinion, New Oriental may hold too much cash on hand, which could not be reacted favourable by the market.

* Competition/Industry

New Oriental is on education industry which is influenced little by this financial crisis compared with other industries such as airline, banking, and energy. Therefore, New Oriental could be less effected and perform stable in financial crisis. Actually, EDU’s Beta is 0.33 to the personal service industry and 0.56 to Non-Cyclical Consumer Goods & Services sector. Those two betas are quiet small and furthermore illustrate that EDU is not too sensitive to both the industry and the sector.

New Oriental nearly has no competitors in education industry in China; however, it does have some competitors in education industry in the world. The most important competitor would be Capella Education Company listed on NASDAQ.

In summary, New Oriental is a quite good choice based on its special industry and the Chinese economic background. However, the cash flow New Oriental holds on hand could be a possible hidden trouble for its stock. I suggest that investor select it as part of the whole portfolio because of New Oriental’s stable increasing revenue in nearly future and its relatively safe educational industry.



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