new oriental education
TRANSCRIPT
NYSE: EDU
Analyst: Weifeng Liang
General Information
Sector: Services Current Price: $47.97(As of Jan 25th)
Market Cap: 7.55 B EPS: $1.43 52 Week High: $ 53.38 52 Week Low: $ 28.43
Language Training and Test Preparation
Courses
Online Education Primary and Secondary Schools
Educational Contents
K-12 After-School Tutoring Courses
Other Services
84%
3% 2% 11%
% of Revenue in FY 2016 Language training & test preparation
K-12 & online education
Primary & secondary education Books & Others
Investment Thesis
Downward Momentum
Resulted from Recent
Negative News Is Creating a Better Buy-in Opportunity
China’s Studying Abroad Trend
The New Blue
Ocean: K-12
Tutoring
Recommendation: Strong Buy Target Price: $66
MOS: 27.32%
Investment Thesis 1
Downward Momentum Is Creating a Better Buy-in Opportunity
Investment Thesis 2
340 400 414 460
524
2011 2012 2013 2014 2015
Numbers of Outbound Students(in thousands)
Data Source: Chinese Ministry of Education
China’s Studying Abroad Trend
19.32 17.63
3.58
11.1 13.9
0
5
10
15
20
25
2011 2012 2013 2014 2015
Growth Rate(%) of Chinese Students Studying Abroad
Investment Thesis 3
K-12 Market Scale Growth Rate
Unit: In CNY100 Millions
The New Blue Ocean: K-12 After-school Tutoring
28% 29% 29% 30% 30% 30% 29% 27% 25% 22% 21%
26% 28% 30% 31% 33% 35% 37% 39% 42% 45%
48%
32% 30% 27% 27% 25% 24% 23% 23% 23% 23%
2% 13% 13% 12% 12% 11% 11% 10% 10% 10% 10% 9%
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Market Share Among the Education Industry
Test Preparation After-school Tutoring Working Purpoes General Aptitude
Data Source: NBS, Frost & Sullivan, Morgan Stanley Research
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Switz
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Net
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UK
Swed
en
USA
Fran
ce
Finl
and
Aus
tria
Ger
man
y
Bel
gium
Den
mar
k
Japa
n
Chi
na
Aus
tral
ia
Italy
Spai
n
Kor
ea
Cze
ch
Bra
zil
Average
% of K-12 Families Education Spending per Capita GDP
Data Source: www.chyxx.com
2% 1% 1% 2%
94%
Market Share of China’s K-12 Industry in 2013
New Oriental Xueda Education Group TAL Education Group 4th to 10th Others
Data Source: www.chyxx.com
DCF Analysis
DCF Results
Current Price: $47.97 Target Price: $66 MOS: 27.32%
Assumption: Revenue Growth Rate: 15% Constant Growth rate: 3.5% Discount Rate: 8%
13.00% 14.00% 15.00% 16.00% 17.00%
9.00% -9.02% 0.06% 7.75% 14.34% 21.36%
8.50% 4.06% 11.17% 17.29% 23.86% 29.46%
8.00% 14.34% 21.36% 27.32% 32.44% 37.70%
7.50% 25.05% 30.48% 36.04% 41.50% 45.49%
7.00% 35.18% 40.78% 45.49% 49.51% 53.43%
MOS Sensitivity Analysis
Growth Rate
WACC
Relative Valuation
Key Ratios Comparison
P/E FY2016
P/B FY2016
ROE FY2016
ROA FY2016
Finl Lev FY2016
Revenue FY2016
(in million)
Profit Margin FY2016
New Oriental 29.87 4.71 16.95% 10.33% 1.64 $1478.35 15.05%
Industry Average 49.47 5.95 13.29% 5.77% 3.03 $733.21 4.84%
0
10
20
30
40
50
60
P/E P/B Finl Lev
New Oriental Industry Average
0.00%
5.00%
10.00%
15.00%
20.00%
ROE ROA Profit Margin
New Oriental Industry Average
Regression Analysis
P/B P/E Log (Revenue) ROA Beta
New Oriental 6.63 24.89 3.17 10.33 0.85
Industry Average 5.86 31.26 2.66 8.83 0.87
0
10
20
30
40
P/B P/E Log(Revenue) ROA Beta
New Oriental Industry Average
Precedent Transactions
Scenario Median Multiple Implied Price Margin of Safety
Price/Free Cash Flow 27.43112719 79.01483228 39%
EV/EBITDA 15.9297514 31.15514573 -54%
Price/Sales 2.851527929 26.77580723 -79%
Median Implied Price 31.15514573 -54%
Valuation Spread
Margin of Safety Number of Valuations
10% > MOS 8
20% > MOS > 10% 4
30% > MOS > 20% 7
MOS > 30% 12
Total 31
Potential Risk
u New Oriental is facing a class action lawsuit and being suspected of engaging in college application fraud.
u New Oriental maybe seriously impacted if colleges
and universities rely less on assessment tests.
u New Oriental may be adversely affected if it can not retain qualified teachers
Conclusion
1. Recent Downward Momentum is Creating a Better Buy-in Opportunity
2. China’s Studying Abroad Trend 3. The New Blue Ocean: K-12 Tutoring
I recommend a strong buy of New Oriental with a target price of $66 and a margin of safety of 27.32%