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EDU’s growth is slowing and will slow even more

New Oriental’s price is going up, which may not be justified by the
company’s growth potential.

The company cut its guidance for current Q3 on February 12, barely
three weeks after it released its earnings on Jan. 20, when it issued
the guidance.

Admittedly, the cut was not big, as it represented only about five per
cent of its original guidance. The 25 per cent tumble in share price
following the cut therefore seemed disproportionate, at least on the
surface.

But the fact that guidance was cut at all for Q3 should be alarming.
It should be taken as a clear sign that the company is having trouble
sustaining the growth rate that investors have come to take for
granted.

Investors had reasons to expect a very decent Q3 this time:
     Q3 this year benefits from a longer winter vacation for regular
school students than last year. This year, the company had two more
weeks than last year to conduct classes and programs on a full time
basis. As Q3 is the company’s second most important quarter, the extra
two weeks should have translated into additional earnings.
     Q3 last year not only was shorter but also suffered from the
unusually harsh snowstorms that paralyzed half the country for weeks,
preventing many students from traveling to the company’s classes. The
earnings of Q3 last year were therefore comparatively modest and thus
formed a lower basis for Q3 this year to grow from and compare with.
     Q1 this fiscal year coincided with China’s Olympic Games. At the
earnings conference call for Q1, it was explained that some students
were unable to attend the company’s classes during Q1 because of the
Olympics, and those students were expected to make up their training
during Q3, when they would be off their regular schools.

These factors should have worked in favor of a strong Q3, by driving
Q3 earnings higher than normal. At least, Q3 this year should be a
good comparison to Q3 of last year.

The prompt cut to guidance shows that the management had found serious
problems in their growth outlook. They cited the economic downturn as
having a greater impact than anticipated, but the problems probably
ran deeper.

Some fundamental problems can be detected from the Q2 numbers.

Q2 showed an increase of GAAP net income of 57.5%, supported by an
increase in student enrolment of only 13.4%. That is a huge gap,
bridged by increased fees and prices. In other words, individual
students are paying considerably more for their classes.

There is of course a limit to how much prices can be increased,
particularly in times of economic downturn and heightened competition.
As enrolment growth slowed, the company had to increase prices to
achieve a better bottom line, but in doing so, the company was making
it even more difficult to recruit students and improve enrolments.

The company’s answer to slowing enrolment growth is naturally to spend
more on selling and marketing. That is why, in Q2, the company’s
selling and marketing cost increased by 62.9%.

The result is that the company spent 62.9% more on selling and
marketing, achieved a net income growth of 57.5%, and a student
enrolment growth of 13.4%. When these numbers are put together, they
look quite unsettling.

In fact, slowing growth in student enrolments has been a trend for
several quarters now. In spite of net income growth of over 30, 40 and
even 50 per cent, growth in student enrolments has seldom exceeded
20%.

The company’s spin on the numbers is that, due to their branding
power, they have the pricing power. The truth is probably much benign.
They have been increasing prices to make up for the slowing growth in
enrolment. The question is how far you can go in doing this.

The company’s problem now is at least partly the result of their own
successes, which have inspired the emergence of many competitors.
Domestic investors, foreign venture capitalists, and ambitious local
entrepreneurs have jumped onto the education bandwagon en masse, all
trying to rewrite New Oriental’s success stories. As the business
environment gets tougher amidst the economic slowdown, far two many
investors and businesspeople see training and education as a safe
investment.

Now, New Oriental faces stiffer competition than ever before. In
response, the company now has to hire better teachers, downsize
classes, and spend more on marketing, all combined to jack up the
company’s expenses and east into its margins.

A few years ago, many of the company’s classes had one teacher
teaching hundreds and sometimes thousands of students. Such huge and
cost effective classes are now no longer acceptable to the students,
as they shop around for best services and best deals.

None of this is surprising, though. Slower growth is only symptomatic
of the company’s maturity. As the company’s gets bigger and more
mature, and as it faces up to more and more competition, its breakneck
growth rate is gone. It is still a good company and it will keep on
growing for the foreseeable future, but it is probably no longer the
kind of growth story as it once was.

It can grow between 10 and 15 per cent. 20 per cent is sometimes still
possible. But 30 per cent is clearly not sustainable. Come earnings
time, the company will meet its guidance for Q3, but its guidance for
Q4 will not be very pretty. Its outlook further down the road will
darken even more.

For the long-term investor, this is probably good news. Once the stock
price stabilizes on a reasonable level, the stock will be worth having
for years to come. But its high valuation as a wild growth story will
probably have to go, sooner or later.

I own few FEED (Agfeed) with the same PE like  GFRE  too.

This is why i am concerned with  EDU.

Any  response ?

I also expect it will back to $50 in two weeks.

agree, time to buy, EDU keep above $50 even the market is so bad. this
drop really a good chance to load up this baby. EDU is the No. 1 in
Chinese education , invest in Chinese education sector you will never
fail.

SPAM SPAM SPAM

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Is  Google  correct saying that the PE is  35 ? Has the company
released any official  report saying about the eps in  2008  and
2009 ?

I do like the chinese stocks and i have GFRE.OB mainly and  few  EVK
and  IFSG.OB  which  all have PE  less  than  3. So i am a bit spoiled
apparently.

Thus i would welcome your insight about the  seemingly  high  pe  of
EDU.

My pleasure sun...

Thank you very much!! wow...