Sector financial performance:

This company, who provides post-secondary degree education and non-degree programs, has been grouped into private university –higher education industry.

It seems that demand for higher private education –degree grand is still solid in the past several years but varied depending on programs. However, generally universities in this sector have experienced increasingly competition in admission. At the same time, price/economy elasticity is apparent. Due to the whole unfavourable environment for university education, many universities have to reduce tuition to stimulate enrollment and it seems it has worked for certain programs of those universities.

The direct consequence of intensive competition for some universities in this sector is the increased spending in marketing and admission. The continuingly shrinking profit resulted from competition also forced some of universities to cut programs that are not profitable. As a result of impacts described above, some of companies’ gross margin (include depreciation and amortization, rent, and marketing expenses) went down but others went up. Our data indicate those companies’ gross margins are between 17-23% with G&A as percentage of sale of 7-11%.

The typical operating margins among those companies are between 10-11%.

According to our analysis, the current companies’ enterprise price/EBI ratio is between 21 and46 with an interest/EBITDA ratio of 0-40%.

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Company performance:

It seems that the demand for this company’s undergraduate education program has been solid in the past several years as indicated by increase in student enrollments at cost of reduction of tuition. The growth in enrollment has been from undergraduate level. In the graduate level, we have seen continued decline in enrollment and as well in tuitions.

The first six months of fiscal 2018 compared with the same period of the 2017

Revenue increased about 2% (2% for 2Q) primarily due to increase of 7% (7% for 2Q) in enrollment offset by decrease in revenue per student due to reduced tuition for new students.

The fiscal 2017 compared with 2016

Revenue increased about 3% primarily due to increase of 6% in enrollment offset by decrease in revenue per student due to reduced tuition for new students.

The first nine months of fiscal 2017 compared with the same period of the 2016

Revenue increased about 4% primarily due to increase of 6% in enrollment offset by decrease in revenue per student due to reduced tuition for new students.

Fiscal 2016 compared with 2015

Revenue increased about 2% primarily due to increase of 3% in enrollment offset by decrease of 1% in revenue per student due to reduced tuition for new students.

Fiscal 2015 compared with 2014

Revenue decreased about 3% primarily due to decrease of 3% in revenue per student due to reduced tuition for new students.

Its gross margin (include rent and marketing/admission expenses) went down to about 24% in 2017 from 28% since 2014 primarily due to more spending in direct costs and in marketing than increase in revenue as a result of increased enrollment and decreased tuition. During the same time, because the G&A as percentage of sales has basically no changes its operating margin went down by about 500 basis points to 13% in 2017. The trend continued in 2018 and caused gross margin down to about 23% and operating down to about 11% in 2018. Therefore, even though reduced tuition has been offset by increased enrollment in terms of revenue, shrinking margin factually hurt this company’s cash flow in the past several years.

Stock price

This stock currently has an enterprise price/EBI ratio of 56($137). We think that its stock is being relatively overvalued considering that growth in enrollment has been on the basis of reduced tuition and shrinking profitability probably resulted from intensive competition for admission.