As red ink bathed markets across the nation yesterday, Chinese for-profit educator New Oriental Education (NYSE: EDU) glowed a soft, reassuring green. In contrast, the numbers it reported -- the ones that gave the stock its boost -- were anything but soft. Fools, this company is a veritable fast boat from China, and laden with profits.
- Total student enrollments in NOE's language and test prep courses surged 24% year over year
- ... giving rise to a 47% rise in revenues
- ... 33% net income growth
- ... and 36% better earnings per ADR (representing four common shares).
Admittedly, everything's bigger in China. But these aren't the only large numbers worth noting. At last report, NOE had some 545,000 students enrolled in its various courses. That makes the firm more than 50% bigger than the powerhouse-iest of for-profit educational powerhouses in the U.S., Apollo Group (Nasdaq: APOL), with its 340,000-odd students enrolled in degree-seeking courses, and nearly 10 times as large as the entire student body at ITT Educational (NYSE: ESI). Closer to home, NOE is four times as large as both online educators ChinaEdu (Nasdaq: CEDU) and ChinaCast Education (Nasdaq: CAST).
With scale like this, you might expect NOE to reap, well, economies of scale. That's certainly been the case at fellow Chinese wunderkind Baidu.com (Nasdaq: BIDU), where operating margin-growth is on a roll. At least for now, though, that doesn't seem to be working out for NOE, which is instead mimicking the pattern of hypergrowth stocks like Under Armour (NYSE: UA), where we've seen sales race ahead in the company's expansion phase, while profits tag along a bit later.
Why that is
You might think NOE has more in common with Baidu, but in fact, the reason for its slower profits growth has more in common with Under Armour -- in that both companies are busy building the infrastructure necessary for a sustainable competitive advantage. In UA's case, this infrastructure consists of marketing the brand and building an inventory of new products for market.
NOE, meanwhile, is building its advantage by offering smaller class sizes to its customers. Here, it's gross margins coming under pressure as NOE cuts class sizes by 33% to an average of 40 students per teacher, and in some cases even smaller. Smaller classes means more teachers, a larger payroll, and smaller margins.
Foolish takeaway
Still and all, NOE is earning gross margins well in excess of 60%, even under the new paradigm. If it can do that, while improving its offerings over those of its rivals, staving off competition in the huge Chinese education market, I say more power to 'em.
What's new in the Orient? Read all about it:
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