DL China Distance Education Holdings Limited
Sector financial performance:
This china-based company, who primarily provides online lectures for professionals to gain licenses and skills mainly in fields of accounting, healthcare, and engineering &construction, has been grouped into online education for professionals sector in education industry.
The growth in revenue from core business – accounting, healthcare, and engineering certificate preparation courses seems to slow down in the past several years (10%, 6%, and 2% in 2015, 2016, and 2017 respectively, data from a typical company, excluding negative impacts of suspension of accounting exam). While growth in online service sales seem to come back again in 2018, the much lower margin of those service sales may mean that growth of 2017/18 in service sales may not have come from increase in natural demand and thus not be sustainable.
As the growth in revenue from core business went down between 2015 and 2017, we see the declined gross margin (a typical gross margin was 56% in 2017 down from 59% since 2016). Under the pressure of declining enrollments, companies increased spending on selling and marketing and thus caused a large rise in SG&A as percentage of sales. The typical operating margin among those companies had gone down to about 15% in 2017. However, the largely decreased margin of its online education service in 2018 further dragged its whole operating margin down to 10% in 2018.
According to our analysis, the current companies’ enterprise price/EBI ratio is 33 with an interest/EBITDA ratio of 17%.
While negative impacts from suspension of accounting exam, this company still managed to increase its revenue by its non-core business in 2017. Benefiting from increased demand for its online education service and sales of other materials, we have seen a jump in its sales of 2018.
The first 9 months of fiscal 2018 compared with same period of 2017(ended 20180630)
Net sales increased by about 27% primarily due to increase in online education, materials, books, and others. Its core business-online service was up about 27%.
Fiscal 2017 compared with 2016(20170930)
Net sales increased by about 11% primarily due to increase in materials, books, and others. Its core business-online service was up about 2% primarily due to other increase offset by decrease in enrollment as a result of suspension of accounting license exam.
The first nine months of fiscal 2017 compared with the same period of 2016
Net sales increased by about 13% primarily due to increase in materials, books, and others. Its core business-online service was flat primarily due to decrease in enrollment as a result of suspension of accounting license exam.
Fiscal 2016 compared with 2015
Net sales increased by about 9% primarily due to increase of 6% in education service (accounting and healthcare mainly) and increase in 17% in book and materials.
Fiscal 2015 compared with 2014
Net sales increased by about 11% primarily due to increase of 10% in education service (healthcare mainly).
Its gross margin (including rental costs and depreciation) went down by about 100 basis points from about 59% to 56% (201709) since 2014. During the same time, while revenue increased its SG&A as percentage of sales to increase even faster reflecting increase in both selling and admin expenses. After the increase of about 500 basis points in SG&A as percentage of sales, its operating margin down to about 15 % in 201709 (based on 12 months trailing data). However, probably because the huge increase in sales (online education mainly) of 2017/18 come from lower margin services, its gross margin went down to 49% and operating margin down to 10% in 2018. Cash flow has decreased significantly in 2017/18 due to decrease in sales of some of high margin online education service.
This stock currently has a companies’ enterprise price/cash flow ratio of 33 ($8). We are not seeing the obvious discrepancy or swinging too far away from its peers. However, it may be slightly overvaluing considering pressure of its sales of online service.