New Oriental Education and Technology Group
has a finger in many educational pies and judging from its soaring
share price, investors see tasty returns in China's higher education
market.
New Oriental's recent IPO was 35 times oversubscribed and at yesterday's share price of $24, institutions lucky enough to get in at the IPO price are showing a 60% profit.
The company makes money mostly from English language test preparation courses and last year it had about 375,000 students enrolled. According to Forbes it enjoys a near-monopoly in language and entrance examinations such as TEFL, SAT and GMAT, which are essential requirements for Chinese students who want to get into university or business school in the US.
New Oriental also offers books, CD-ROMs and online training.
Rising incomes and one-child families mean Chinese parents are prepared to spend more on higher education and investors clearly believe New Oriental is well placed to benefit from the trend.
Nice business and the market opportunity is sizable, but as Motley Fool points out, the shares are now trading at around six times revenues and such a premium can only really be justified if New Oriental manages to hang on to its near-monopoly.
There are competitors, not least well-known foreign firms like Wall Street Institute and Princeton Review, but they are aimed at wealthier students, according to the China Market Research Group. New Oriental focusses on the sweet spot of China's burgeoning middle class.
A cautionary tale from Spain, home of your EngagingChina correspondent, suggests that private education is not always the rock-solid investment opportunity that it might seem.
In the late 1990s, private English-language schools flourished in Spain, helped by buoyant economy and the widespread use of franchise model. But a series of series of scandals involving aggressive sales methods led to the collapse of half a dozen chains and lawsuits. The industry has never really recovered from the damage done.
Elsewhere on the investment front:
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Mindray, the Chinese manufacturer of medical equipment featured in an earlier EngagingChina story, made a strong debut on the NYSE last week. By the end of the first day, the price was 30% above the $13.50 IPO price, although it has since declined. The exchange expects about half a dozen more China-related IPOs in the coming months.
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Calpers, the largest public pension fund in the US, is considering investing in China shares for the first time. Pension funds are not as cautious as they once were, but a vote of confidence by Calpers, which previously spurned Chinese companies because of poor governance, would increase demand for US- or HK-listed China plays, says the Financial Times ($).
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Moodies is embarking on its first major foray into the ratings business in China in a JV with China Cheng Xin Credit Management, a local ratings provider. Moodies' analysts probing Chinese firms are likely to have their work cut out , warns the FT ($), as balance sheets can be hard to decipher and inter-company dealings difficult to untangle.
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