EDU NEW ORIENTAL EDUCATION
Sector financial performance:
This china-based company, who primarily provides English and other foreign language training and test preparation courses and other education services for admissions and assessment test, has been grouped into language training and test preparation sector in education industry.
Sales of companies in this sector (China market) seem to grow very quickly in the past several years (around average 20-36% annual growth rate based on a typical company data) primarily due to fast increase in k-12 after school tutoring and to less extent the test preparation courses for admission.
Before 2017, due to the increase in revenue mainly has come from the service areas that companies in this sector were covering but not from new location/new centers, their gross margins got improved (a typical gross margin was 58% in 2017). Therefore, helped by the decreased SG&A as percentage of sales due to leverage of increased revenues, companies’ operating margin got improved as well (A typical operating margin among those companies has gone up to about 14% in 2017 from 12% of 2014). Companies’ income and cash flow thus gained a strong growth due to increase in both margin and sales. However, we have seen gross margin of typical company down since 2017 (56.5%) probably as a result of change in driver of enrollment growth from same center to new center and, with increase in SG&A% (mainly share-based compensation), its operating margin has been down to about 11% in 2018.
According to our analysis, the current companies’ enterprise price/EBI ratio is 77 with an interest/EBITDA ratio of 0%.
Revenue, accompanying with very fast growth in enrollment of courses, has increased fast with upward trend in the past several years. While we need more information of where those large increases in revenue and student enrollment come from, a booming of the whole industry/organic demand for language training and test preparation or grabbing market shares from other competitors? It seems that the demand for this company’s courses has come mainly from K-12 after school tutoring and test preparation courses for admission.
Fiscal 2018 compared with 2017
Net sales increased by about 36% primarily due to increase of 30% in language training and test preparation courses enrollment.
Fiscal 2017 compared with 2016
Net sales increased by about 22% primarily due to increase of 23% in language training and test preparation courses as a result of increased enrollment.
Fiscal 2016 compared with 2015
Net sales increased by about 19% primarily due to increase of 19% in language training and test preparation courses as a result of increased enrollment.
Its gross margin (including rental costs and depreciation) went up by about 50 basis points to above 58% (2017) since 2014. During the same time, its SG&A as percentage of sales also got improved by about 180 basis points primarily due to smaller selling and marketing spending as percentage of sales probably as a result of leverage of increased revenue and thus caused its operating margin up by about 230 basis points to about 14% in 2017 (based on 12 months trailing data). However, in 2018 probably due to promotions or deleverage of rental and depreciation, its gross margin has been down to about 56.5%. With increase in SG&A% (mainly share-based compensation), its operating margin has been down to about 11% in 2018.
This stock currently has a companies’ enterprise price/cash flow ratio of 77 ($75). We think that its stock is being relatively slightly overvalued considering that the upward trend in growth of high margin revenue may be changing. In addition, most of its recent increase in sales and income has come from non-core business of this company, which is K-12 after school tutoring. While this company has successfully leveraged its brand into fast increasing business in after school tutoring, it still needs a better performance to justify its as high as ratio of 77.