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ChinaCast Edu. Coverage Initiated by Chinavestor

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CAST_09Q2-tumb Chinacast Education Corp. (NASDAQ:CAST) accomplished its fast development in the beginning of this century based on the highly developing tele-communication industry in China. Recent years, Chinacast Education Corp. (NASDAQ:CAST) extended its service into the post-secondary education and e-learning services.

As one of the few companies who went public in American, Chinacast Education Corp. (NASDAQ:CAST) owns its own unique advantages in education industry. Relying on China’s highly developing speed and the unique business and political environment, Chinacast Education Corp. (NASDAQ:CAST) performed well in the past few years. Recently announced that Chinacast Education Corp. (NASDAQ:CAST) will acquire another education institution in China, and this event will certainly have positive influence on Chinacast’s future performance. Following are investment highlights and the reasons for our recommendation:

  1. High margin, recurring service income provides excellent visibility and strong free cash flow

The education sector is one of the fastest growing consumer markets in China driven by increased consumer spending power and government deregulation. Chinacast Education Corp. (NASDAQ:CAST) has superior valuation metrics vs. other public comps.

  • Valuable PRC operating licenses

Ministry of Education (MOE) accredited four-year and two-year university degree programs and Ministry of Information Industry (MII) nationwide satellite broadband ISP license.

  • Seasoned multinational management team

Extensive public company experience with US, PRC, Hong Kong and Singapore Exchanges and ability to complete deals.

  • Sound growth strategy capitalizes on key market opportunities

Strong demand and limited penetration rates of post-secondary sector provides significant long term growth potential

  • Near term catalysts

Recently announced MOU to acquire an additional for-profit university in China. Deal expected to be accretive and targeted to be completed in 3Q 2009. Healthy balance sheet and cash flow to fund further aacquisitions.

 

Financial Statement Highlights

Balance Sheet


In Millions of CNY

Quarter

2-2009

Quarter 1-2009

Quarter 4-2008

Quarter 3-2008

Quarter 2-2008

Revenue

76.08

76.94

79.84

72.78

73.92

Gross Profit

46.62

46.16

27.32

41.99

40.34

Total Operating Expense

41.23

48.97

82.95

47.66

44.84

Operating Income

34.84

27.97

-3.11

25.12

29.08

Net Income

25.8

19.68

-11

19.69

25.74

Diluted Weighted Average Shares

35.8

35.65

23.4

31.37

27.39

Diluted Normalized EPS

0.72

0.55

-0.23

0.63

0.94


Income Statement


In Millions of CNY

Quarter

2-2009

Quarter 1-2009

Quarter 4-2008

Quarter 3-2008

Quarter 2-2008


Cash & Equivalents

132.65

88.02

220.13

87.88

19.8

Accounts Receivable

48.31

48.62

35.07

61.53

41.17

Total Current Assets

697.15

647.19

634.61

570.19

445.99

Total Assets

1,529.55

1,496.94

1,499.16

1,421.25

1,283.99

Total Debt

122.36

82.08

82.01

86.33

86.68

Total Liabilities

448.53

444.92

472.6

450.33

425.87

Retained Earnings (Accumulated Deficit)

129.12

103.33

83.64

94.64

74.5

Total Equity

1,081.02

1,052.02

1,026.56

970.92

858.13

Total Common Shares Outstanding

35.77

35.65

35.65

31.39

31.29

 

Cash Flow Statement

In Millions of CNY

6 months ending 2009-06-30

3 months ending 2009-03-31

12 months ending 2008-12-31

9 months ending 2008-09-30

Net Income

50.39

22.24

42.67

53.66

CFO

28.62

0.04

213.06

147.56

CFI

-153.45

-132.16

-287.15

-299.88

CFA

37.35

0

155.94

101.96

Cash

-87.48

-132.11

81.52

-50.73


Strong Revenue Growth

1.      Historical Data Analysis

Chinacast Education Corp. (NASDAQ:CAST) has a history full of aacquisitions. It was formed as Great Wall Acquisition Corporation on 2003 as a blank check company, and then acquired ChinaCast Communication Holdings Limited (“CCH”) which listed on the Stock Exchange of Singapore in 2007 and terminated its SGX listing then. In 2008, the Company acquired the holding company (Hai Lai Education Technology Limited) of Foreign Trade Business College of Chongqing Normal University (“FTBC”). Therefore, by the end of 2008, the Company has successful expanded its service into two business divisions, the E-learning and training service Group (the “ELG”), and the Traditional University Group (the “TUG”), offering bachelor and diploma programs to students in China.

CAST_09Q21

Source: Chinacast Investor Presentation (2009)


CAST_09Q22

Source: Google Finance

The above graph illustrates that the Company’s revenue has been increasing from around 150 million RMB to nearly 300 RMB since 2005. The Company’s principal sources of revenues are from the provision of satellite bandwidth and network access services in distance learning, broadcasting of multimedia educational content through broadband satellite network, and to a lesser extent, the provision of English training services and sales of satellite communication related equipment and accessories. The revenue from service in distance learning is highly predictable since the Company signed with almost one third of the universities which are proved to conduct distance courses in China by the PRC Educational Department. Unless the policy change, otherwise this part of revenue will be kind of “fixed” income. It is also shown in the following table that the Company transferred its focus into service in recent years.

In RMB

For the years ended December 31,

2006

2007

2008

Revenues

Service

125,556

148,903

257,126

Equipment

48,563

38,827

28,912

174,119

187,730

286,038

Source: Google Finance

However, on the other hand, the Company’s net income fluctuated during the past four years. This can be explained by its comparable high impairment loss and loss on discontinued operations both in 2006 and 2007. Because the Company provides E-learning and training services which rely highly on technology development, its long-lived asset has to be reevaluated whenever events or changes happen in technology circumstances. Fast technology development results in the impairment loss on Chinacast’s long term assets. The loss from discontinued operations is due to the Company’s investment in one of its subsidiary Tongfang Chuangxin Techonology Limited in 2007.

CAST_09Q23

Source: Google Finance

The company’s quarterly revenue and quarterly net income stays pretty stable since 2008 except that in Quarter 4 in 2008 when the financial crisis happened and influenced dramatically the Company’s stock price and also its business environment both in US and in China.

CAST_09Q24

Historical Stock Price from Yahoo Finance

However, when we look into the whole history of Chinacast’s movement, it can be found from the above graph that Chinacast Education Corp. (NASDAQ:CAST) had been increasing from $5 to around $8 between 2004 and 2008, when suddenly its share price dropped dramatically to almost $2, and it began to climb up again since the beginning of 2009. The main reason for this significantly dropping is the financial crisis which influenced heavily in 2008. On the other hand, it can be illustrated that the current movement of CAST is just continuing what it had already done before 2008. By using other words, it can be understand as CAST went back to its previous boom time, and it is highly possible that it will continue to rise in the coming period.

2. Demands Driving in short run period

Over the long period of view,Chinacast Education Corp. (NASDAQ:CAST) owns its own advantages in this education industry which is full of chances and opportunities.

It is shown that because of China’s one child policy and the specific culture which focuses education, China’s education expenditure has been increasing dramatically since the past few years.

CAST_09Q25

Source: China Statistical Yearbook

On the other hand, China has the largest population in the world, which provides Chinacast Education Corp. (NASDAQ:CAST) a unique business environment and abundant educational service demanding. Since 1980s, along with the Chinese government’s investment in education industry, china’s post and secondary education market has been increasing quickly. By the way, people who have received high level education in China at present still account for small percentage, and this provides Chinacast Education Corp. (NASDAQ:CAST) plenty of potential opportunities.

CAST_09Q26

CAST_09Q27

Source: US DOE/NCES, PRC Min. of Education, UNESCO Statistical Yearbook, US Census Bureau

Besides, college degrees worth much more, especially in long run, in China, as seen in graph next page. This phenomenon encourages Chinese people to go to graduate and post-graduate school in order to receive higher education.

CAST_09Q28

Source: US Dept. of Labor

3. Political Environment in Long-time Period.

In the past decades, Chinese government has improved a lot China’s education environment. For example, Chinese government actualized the Nine-year compulsory education and enhanced dramatically whole citizen’s education level. In the long-run, political environment swill influence a lot the future revenue of Chinacast Education Corp. (NASDAQ:CAST) as well.

Followings are several potential positive signals for the future revenue:

  • The Ministry of Education recently announced a medium term (2008-2020) higher education reform and development plan to transform China into a learning society and to increase the skills of its labour force.
  • Moreover, in 2008, there were 22.3 million university students studying at 2,500 higher education institutions, and by 2020, the government has targeted 40 million higher education students – an increase of 17.7 million students (80% growth).

Hence, the government will need assistance from the private sector in order to achieve these goals:

  • Investment capital to augment government spending
  • Assistance in the development of different areas of higher education to address the needs of the market (graduate/research, adult education, continuing education, online education, vocational, etc.)

In the recent years, followed by the more exoteric education policy, more and more private schools were established in China and those institution’s degrees became more accepted as well. All of those changes are good for Chinacast’s future expanding.

CAST_09Q29

Cash Flow of Chinacast from 2006 to 2008

The company’s CFO increased from from 2005 to 2008 due to its increasing revenue.

Its cash outflow in investing activities increased in the past three years. It is explained by the Company’s expansion to education industry and its increasing spending on purchasing property and equipment. Moreover, the increasing number is also due to the Company’s purchase of subsidiaries including CCH and FTBC.

The company’s CFF fluctuated a lot in the past 3 years. Its cash outflow in financing in 2007 is outstanding. This negative number could be explained by the Company’s capital distribution and its payment of expenses in connection with share exchange transaction. Both of these two activities are connected by the Company’s expansion through aacquisitions.

CAST_09Q210

Source: Chinacast Investor Presentation (2009)

In conclusion, since the only net cash outflow in 2007 is due to its acquisition for the other companies, generally speaking, the Company still has enough amounts of free cash in hand.

• Competition/Industry

The Company is listed in Schools Industry in US, and there are some competitors from China in this particular industry, such as China Distance Education Holdings Ltd. (Public, NYSE:DL), China Education Alliance, Inc. (Public, AMEX:CEU), and New Oriental Education & Tech. Group Inc (Public, NYSE:EDU).

China Distance Education and China Education Alliance both provide online and distance education courses, and they have similar target consumers with Chinacast. But Chinacast owns its own advantage compared with those two companies -- Chinacast Education Corp. (NASDAQ:CAST) provides provision of satellite bandwidth and network access services in distance learning which is far more hardware industry. Furthermore, CDE and CEA trade at similar prices as Chinacast Education Corp. (NASDAQ:CAST) as well.

Furthermore, compared with EDU, Chinacast still has long way to go. As mentioned in my previous analysis, EDU has been going through a dramatically increase since it went public at around $20, and it trades at around 70 dollars now. But on the other hand, Chinacast’s EPSs in recent quarters are all much higher than that of New Oriental.

Comparison among CDE, CEA, EDU and CAST (in most recent two quarters)

In millions of Dollars

CAST

EDU

DL

CEU

Revenue

22.50

124.88

12.49

16.32

Net Income

6.69

13.05

0.35

6.47

Net Profit Margin

0.30

0.10

0.03

0.40

Cash (2008 fiscal year)

11.99

4.04

59.12

11.64

Diluted Normalized EPS

0.635

0.045

0

0.13

Current Ratio

2.33

2.95

5.67

11.64

Debt-to-Equity

0.113189

0

0

0

 

It can be illustrated from the above graph that CAST has the highest EPS which was 0.635 in the most recent Quarter which ended in June, 2009. Moreover, CAST also has a high net profit margin.

Chinacast Education Corp. (NASDAQ:CAST) owns $11.99 million cash which is in the middle level among those four stocks. In comparison, New Oriental’s cash has exceeded the normal

level and presented as overmuch. It may be seen as the negative signal for the market as New Oriental’s managers may not find a good investment project as soon as possible. Besides, it may also indicate that managers of New Oriental didn’t perform in order to make highest return for its shareholders. The current ratio of Chinacast is around 2, which is pretty health. In comparison, China Education Alliance and especially China Distance Education may own two few debt. The debt-to-equity ratio of Chinacast was 0.11, comparing with the other three’s 0 rates. It is reasonable to see the debts of the other three companies are 0 especially in this financial environment. It is hard to issue debt; besides, paying off debt could reduce the business risk of these companies. The Chinacast’s debt-to-equity ratio is still in the usual range.

In conclusion, compared with the other three competitors who have same industry, and same business environment with Chinacast, Chinacast Education Corp. (NASDAQ:CAST) performed very well. Most importance, it provides the highest EPS in recent quarters. Generally speaking, Chinacast Education Corp. (NASDAQ:CAST) is a good choice for investors, not only in the short run but also in a long time period.

 


Table 1. Chinacast Education Corporation, Income Statement (2005 to 2008)


In Millions of CNY

2008

2007

2006

2005

Revenue

286.04

187.73

174.12

146.02

Other Revenue, Total

-

-

-

-

Total Revenue

286.04

187.73

174.12

146.02

Cost of Revenue, Total

147.98

85.5

89.39

69.35

Gross Profit

138.06

102.23

84.73

76.66

Selling/General/Admin. Expenses, Total

76.78

61.78

45.94

38.51

Unusual Expense (Income)

8.5

0

13.27

0

Other Operating Expenses, Total

-6.5

-18.04

-11.62

-14.29

Total Operating Expense

227.92

123.16

139.09

95.94

Operating Income

58.12

64.57

35.03

50.08

Other, Net

-

0

0

0.58

Income Before Tax

75.01

84.69

43.31

55.24

Income After Tax

50.62

63.42

31.01

44.7

Minority Interest

-7.52

-3.24

-5.83

-8.57

Equity In Affiliates

-0.44

-1.16

-0.91

-0.4

Net Income Before Extra. Items

42.67

59.03

24.26

35.72

Net Income

42.67

58.66

19.7

34.89

Income Available to Common Excl. Extra Items

42.67

59.03

24.26

35.72

Income Available to Common Incl. Extra Items

42.67

58.66

19.7

34.89

Basic Weighted Average Shares

-

-

-

-

Basic EPS Excluding Extraordinary Items

-

-

-

-

Basic EPS Including Extraordinary Items

-

-

-

-

Dilution Adjustment

0

0

0

-

Diluted Weighted Average Shares

30.69

27.98

19.73

17.29

Diluted EPS Excluding Extraordinary Items

1.39

2.11

1.23

2.07

Diluted EPS Including Extraordinary Items

-

-

-

-

Dividends per Share - Common Stock Primary Issue

0

0

0

0

Gross Dividends - Common Stock

-

-

-

-

Total Special Items

-

-

-

-

Normalized Income Before Taxes

-

-

-

-

Effect of Special Items on Income Taxes

-

-

-

-

Income Taxes Ex. Impact of Special Items

-

-

-

-

Normalized Income After Taxes

-

-

-

-

Normalized Income Avail to Common

-

-

-

-

Basic Normalized EPS

-

-

-

-

Diluted Normalized EPS

1.58

2.11

1.71

2.07

 

 


Table 2. Chinacast Education Corporation, Balance Sheet (2005 to 2008)

In Millions of CNY

As of 2008-12-31

As of 2007-12-31

As of 2006-12-31

As of 2005-12-31

Cash & Equivalents

220.13

138.61

278.07

120.37

Short Term Investments

370.62

598.18

443.24

274.25

Cash and Short Term Investments

590.75

736.79

721.31

394.62

Accounts Receivable - Trade, Net

35.07

38.56

44.27

47.88

Receivables - Other

-

-

-

-

Total Receivables, Net

39.98

41.88

44.27

51.98

Total Inventory

1.42

2.02

3.07

3.28

Prepaid Expenses

0.97

0.85

2.37

10.04

Other Current Assets, Total

1.49

1.55

2.51

1.9

Total Current Assets

634.61

783.08

773.53

461.81

Property/Plant/Equipment, Total - Gross

339.75

52.19

51.9

50.89

Goodwill, Net

311.33

1.72

3.54

3.54

Intangibles, Net

153.11

21.78

14.03

19.38

Long Term Investments

5.22

11.16

5.11

19.3

Other Long Term Assets, Total

0.69

1.95

0.17

4.14

Total Assets

1,499.16

950.71

940.58

676.91

Accounts Payable

12.59

13.03

20.87

10.71

Accrued Expenses

126.97

47.37

96.2

44.85

Notes Payable/Short Term Debt

0

0

0

0

Current Port. of LT Debt/Capital Leases

21.19

0.03

0.15

0.15

Other Current liabilities, Total

141.9

37.24

42.77

28.28

Total Current Liabilities

302.65

97.67

159.99

83.99

Long Term Debt

58.4

0

-

-

Capital Lease Obligations

1.32

0

0.04

0.19

Total Long Term Debt

59.72

0

0.04

0.19

Total Debt

80.91

0.03

0.18

0.34

Deferred Income Tax

21.03

0

-

-

Minority Interest

44.58

20.51

145.5

135.58

Other Liabilities, Total

44.61

27.89

0

-

Total Liabilities

472.6

146.08

305.53

219.76

Redeemable Preferred Stock, Total

-

-

0

0

Preferred Stock - Non Redeemable, Net

-

-

-

-

Common Stock, Total

0.03

0.02

0.02

0.01

Additional Paid-In Capital

948.35

768.84

653

493.31

Retained Earnings (Accumulated Deficit)

83.64

40.98

-15.21

-34.91

Treasury Stock - Common

-

-

-

-

Other Equity, Total

-5.46

-5.21

-2.76

-1.26

Total Equity

1,026.56

804.64

635.05

457.15

Total Liabilities & Shareholders' Equity

1,499.16

950.71

940.58

676.91

Shares Outs - Common Stock Primary Issue

-

-

-

-

Total Common Shares Outstanding

35.65

27.29

23.14

16.66

 


Table 3. Chinacast Education Corporation, Cash Flow Statement (2005 to 2008)

In Millions of CNY

2008

2007

2006

2005

Net Income/Starting Line

42.67

58.66

19.7

34.89

Depreciation/Depletion

34.75

5.25

12.34

8.74

Amortization

-

-

-

-

Deferred Taxes

-2.27

0.17

0.17

0.17

Non-Cash Items

47.03

-4.62

23.63

12.6

Changes in Working Capital

90.88

14.19

39.1

1.52

Cash from Operating Activities

213.06

73.66

94.94

57.93

Capital Expenditures

-56.35

-25.22

-1.3

-0.3

Other Investing Cash Flow Items, Total

-230.8

-141.01

-141.71

8.63

Cash from Investing Activities

-287.15

-166.23

-143.01

8.33

Financing Cash Flow Items

64.24

-40.75

196.25

0

Total Cash Dividends Paid

-

-

-

-

Issuance (Retirement) of Stock, Net

98.51

0

9.7

0

Issuance (Retirement) of Debt, Net

-6.8

-4.4

-0.16

-0.29

Cash from Financing Activities

155.94

-45.15

205.79

-0.29

Foreign Exchange Effects

-0.34

-1.74

-0.02

-0.03

Net Change in Cash

81.52

-139.46

157.7

65.94

Cash Interest Paid, Supplemental

4.95

0.04

0.02

0.02

Cash Taxes Paid, Supplemental

3.85

7.87

1.31

3.27

 


Analyst Certification

I, Jiayu Tian, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Other Important Disclosures

The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Chinavestor.com.

Copyright, user agreement and other general information related to this report:

Copyright 2007 Chinavestor.com. All rights reserved. This research report is prepared for the use of Chinavestor.com clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Chinavestor.com.

This research report provides general information only. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice. Past performance is not necessarily a guide to future performance.

Fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.

 

 


IMPORTANT: READ THIS DISCLAIMER

While the analysis is 100 percent independent, some of the sources are from reports provided by HC International, the IR firm representing China Cast Education (NASDAQ:CAST). Statements included in this document may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks and uncertainties such as competitive factors, technological development, market demand, and the company's ability to obtain new contracts and accurately estimate net revenues due to variability in size, scope and duration of projects, and its ability to complete and integrate future acquisition opportunities. As a result, actual results may differ materially from any financial outlooks stated herein. Common stocks involve significant risk and its is possible to loose your entire capital investment. Further information on potential factors that could affect the company's financial results can be found on www.sec.gov. HC International provides investor relations services for ChinaCast Education Corp. (NASDAQ:CAST) and receives financial compensation. Principals and consultants of HCI may own stock in CBEH from time to time. This information does not provide an analysis of the Company’s financial position and is not a solicitation to purchase or sell securities of the Company.



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