As red ink bathed markets across the nation yesterday, Chinese for-profit educator New Oriental Education
- 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
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
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.
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:
Fool contributor Rich Smith does not own shares of any company named above. New Oriental Education & Technology Group is a Motley Fool Global Gains recommendation. Under Armour is a Motley Fool Hidden Gems selection and a Motley Fool Rule Breakers pick. The Fool owns shares of Under Armour. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.