Chinese IPO Meets a Black Eye

I'm starting to realize why Chinese IPOs are getting a bad rap lately.

Shares of China Distance Education Holdings (NYSE: DL  ) fell 5% yesterday, after posting disappointing quarterly results. The provider of Web-based professional education went public at $7 three weeks ago, and it has yet to trade above its IPO price.

This week's earnings report isn't pretty. Revenue grew 35% to $4.6 million, but earnings clocked in at less than a third of what China Distance earned a year ago. E-learning is supposed to be a scalable business. Margins should improve as you grow. However, China Distance is going through growing pains, and that involves everything from leasing extra office space to hiring more tutors and course production technicians than its top-line gains would suggest.

At least the company is growing. Its active enrollment during the seasonally soft period was 199,000 students.

Unfortunately for investors, Web-based education isn't as hot a ticket as it may seem in a country with 1.3 billion people, many longing to be retooled for tomorrow's job opportunities. New Oriental Education (NYSE: EDU  ) and computer-based certification testing provider ATA (Nasdaq: ATAI  ) have fared well, but others like ChinaCast (Nasdaq: CAST  ) , ChinaEDU (Nasdaq: CEDU  ) , Noah Education Holdings (NYSE: NED  ) , and now China Distance are meandering in the single digits.

In China Distance's case, the hardest lesson is that Mr. Market doesn't give a passing grade to those that flunk the quarterly exam. If your first impression (a busted IPO) is bad, and your second impression (its first quarter as a public company) is a stinker, you may as well get used to wearing the dunce cap. Let's hope the company gets it right in three months for the next quarterly exam.

Reach out for more higher learning with these related stories:

New Oriental Education is a Motley Fool Global Gains pick. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz speaks two languages fluently, neither of them Mandarin. He does not own shares in any company mentioned in this story, though he maintains a healthy overseas exposure with international stock funds. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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