Please ensure Javascript is enabled for purposes of website accessibility

New Oriental Education & Tech Grp (ADR) Continues to Shine Brightly

By Brian Stoffel - Apr 20, 2016 at 10:02AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The pivot to after-school tutoring continues to pay dividends for the Chinese company.

More Chinese youth are using New Oriental's services to help boost their academics.

There's probably no industry that's gotten a bigger moral black eye in the last decade than U.S. for-profit education. Relying heavily on government funding, providing extremely questionable instruction, and largely leaving students with a worthless degree and tons of debt, many domestic players have declared bankruptcy or are under government investigations.

But that's not necessarily the case outside of the U.S. Case in point: China's New Oriental Education (EDU 0.93%). Instead of a for-profit university, this school made a name for itself by providing test preparation on English language courses for students who were planning to attend schools abroad. Three years ago, the company pivoted to a more reliable goal of providing after-school tutoring to the millions of middle and high school students in China.

While that transition wasn't easy on shareholders, it has panned out well. And the first quarter of 2016 was no exception, as the stock shot up 9% following its earnings release on April 19.

Just the numbers
On almost all fronts, New Oriental demonstrated impressive growth.

 

Revenue

EPS

Total Enrollment

Tutoring Enrollment

Q1 2016

$347 million

$0.34

755,100

N/A

Growth

20.6%

15.8%

25.2%

31%

Data source: New Oriental investor relations. 

I've been covering the education sector for six years now, and one thing has always remained true: There's nothing more important than enrollment trends. And so, while growth in revenue and EPS are nice, it's the overwhelmingly positive trends in enrollment that bode well for New Oriental and its shareholders.

What management had to say
CEO Micheal Yu broke down these encouraging trends even further -- providing lots of color on the performance of the after-school tutoring arm of New Oriental, and all of the irons it has in the fire:

Our U-Can middle and high school all-subjects after-school tutoring business grew approximately 33% year over year, and the revamped POP Kids program delivered a year-over-year revenue increase of 40%, representing a record high since its launch in 2014. With an ever-increasing market demand for our [online-to-offline] O2O Two-Way Integrated Education System, we have been able to attract an increasing number of new customers for our K-12 business.

These trends are very important, as New Oriental is going after a very large and fractured market and is quickly gobbling up market share.

What else happened during the quarter?

  • The company had a total of 663 learning centers across the Middle Kingdom at the end of the quarter, an increase of five from the same time last year.
  • The company also operated 64 full-time schools, including a new school in Zhuhai, a fast-growing city in southern China.
  • In February, a subsidiary of Tencent Holdings (TCTZ.F -0.55%) invested $50 million in New Oriental's online-only learning platform, koolearn.com. Subsequently, New Oriental has decided to list the operator of koolearn.com on the Chinese stock market, while retaining its ownership and control over the site.
  • While sales and marketing expenses increased at only an 8% clip, general, administrative, and R&D expenses were up 30%.

This last bullet point is important to note, as it underscores that EPS were up just 16% while revenue grew 20%. The company is investing heavily in its new platforms, particularly its online-to-offline one. This isn't an easy or cheap undertaking, but if New Oriental can increasingly connect students to the in-person help they need to succeed in school, the company will be able to grow and maintain long-term market share that should benefit shareholders handsomely.

Management has already indicated that such investments have been a primary driver of not only increased enrollments, but also healthier retention rates.

Looking ahead
For the next quarter -- which is actually the company's fourth fiscal quarter -- management is calling for revenue to come in at a midpoint of $385 million. If met, this would represent growth of 17%. It's important to note, however, that if the renmibi were at a constant value from last year, revenue growth would be clocking in at about 22%.

In the end, the two most important things for investors to watch will be growth in enrollments, and management comments on the success of the company's O2O initiatives.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

New Oriental Education & Technology Group Inc. Stock Quote
New Oriental Education & Technology Group Inc.
EDU
$11.92 (0.93%) $0.11
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCTZ.F
$43.80 (-0.55%) $0.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.