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

By Markets Fool.com

More Chinese youth are using New Oriental's services to help boost their academics. Image source: The Motley Fool.

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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 . 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%

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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 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.

The article New Oriental Education & Tech Grp (ADR) Continues to Shine Brightly originally appeared on Fool.com.

Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends New Oriental Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.