This is a company that has returned 138% in the last 12 months for investors as the company is looking to grow even more in the next few years which spells opportunities if you are looking into a growth play.
The company last closed at it’s historical high at $122.72 and it is continuing to grow at a very fast double digit topline growth in the next few years.
Company Overview
Founded in 1993, New Oriental Education & Tech Group (NYSE: EDU) is the largest provider of private
educational services in China. The company has an extensive network of over 1,261 learning centres
that span across 56 different cities.
New Oriental was the first successful Chinese educational institution to be listed in the New York Stock
Exchange through their public offering back in 2016 and it has a market capitalization of over USD14
billion today.
educational services in China. The company has an extensive network of over 1,261 learning centres
that span across 56 different cities.
New Oriental was the first successful Chinese educational institution to be listed in the New York Stock
Exchange through their public offering back in 2016 and it has a market capitalization of over USD14
billion today.
Growing Network: 1,261 and Counting
The company has a substantial presence in Beijing, Shanghai and Wuhan, where combined they have
a total presence of 245 learning centres, or close to 20% of their entire portfolio.
a total presence of 245 learning centres, or close to 20% of their entire portfolio.
Beijing: Beijing has one of the fastest growing population in China, as the number of people living in the city grew from 13.5m in 2000 to 20.1m in 2019 (source: worldpopulationreview). In terms of GDP per capita, Beijing has also outperformed the rest of the cities by growing at more
than 8% per annum, despite the ongoing Trade Wars threatening the slowdown of their growing
nation.
than 8% per annum, despite the ongoing Trade Wars threatening the slowdown of their growing
nation.
Shanghai:
Shanghai currently ranks first in terms of population density as the modern revolutionized city appeals
to International expats and locals to come to Shanghai for both work and live.
It currently houses a population of about 26m but has the infrastructure capacity to double its living
population in the city to 50m by 2050 (source: shine.cn) through their urbanization transformation in
the region and strong economic growth.
Shanghai currently ranks first in terms of population density as the modern revolutionized city appeals
to International expats and locals to come to Shanghai for both work and live.
It currently houses a population of about 26m but has the infrastructure capacity to double its living
population in the city to 50m by 2050 (source: shine.cn) through their urbanization transformation in
the region and strong economic growth.
Wuhan:
Wuhan is a surprise inclusion because of its strong economic growth and infrastructure transformation
over the years, the city has recorded one of the highest rate of historic population growth over the
years (source: wiki-wuhan).
To date, their population stands at about 10.6m, which is about half the population size of Beijing.
Wuhan is a surprise inclusion because of its strong economic growth and infrastructure transformation
over the years, the city has recorded one of the highest rate of historic population growth over the
years (source: wiki-wuhan).
To date, their population stands at about 10.6m, which is about half the population size of Beijing.
Financial Performance
Revenue has increased by 26.5% year on year from $2.4m in FY2018 to $3.1m in FY2019 and has grown
at a CAGR of 19.8% over 5 years.
at a CAGR of 19.8% over 5 years.
This is mainly due to both the organic aspect of growth (152 new facilities and learning centres added
in FY2019) as well as inorganic growth through the successful implementation of the optimization
strategy coming in from the K-12 After-School Tutoring division and U-Can Middle School, which grow
by 28.5% and 27.2% respectively.
in FY2019) as well as inorganic growth through the successful implementation of the optimization
strategy coming in from the K-12 After-School Tutoring division and U-Can Middle School, which grow
by 28.5% and 27.2% respectively.
Gross Profit margins continued to remain resilient at 55.5% in FY2019, despite coming in slightly lower
than the 5-year average of 57.3%.
than the 5-year average of 57.3%.
As the company seek to embark on its expansion plan, the company has correspondingly incurred
higher costs for marketing and other SG&A related costs such as salary and rent as there are higher
headcounts to account for.
higher costs for marketing and other SG&A related costs such as salary and rent as there are higher
headcounts to account for.
Operating and Net margins have dipped slightly to 9.7% and 7.7% in FY2019, which translates to a
decrease of about 9.2% and 36% from the year before. The drop in net margins in FY2019 is mainly
due to the revaluation loss of their long-term investments.
decrease of about 9.2% and 36% from the year before. The drop in net margins in FY2019 is mainly
due to the revaluation loss of their long-term investments.
Cash-Flow Management
Cash Flow from Operations was approximately at $805m in FY2019, which is slightly higher due to
better working capital and higher depreciation, as compared to $781m in FY2018.
better working capital and higher depreciation, as compared to $781m in FY2018.
Capital Expenditures came in at approximately $251m in FY2019 as the company continues its
aggressive expansion plan by adding 152 new facilities and learning centres across the different cities.
aggressive expansion plan by adding 152 new facilities and learning centres across the different cities.
The company’s business model enables them to continue generating copious amount of Free Cash
Flow, which stands at $553m in FY2019. This translates to an FCF yield of about 3.6% in FY2019, based
on the last closing price at $96.58 (based on 31st May fiscal year).
Flow, which stands at $553m in FY2019. This translates to an FCF yield of about 3.6% in FY2019, based
on the last closing price at $96.58 (based on 31st May fiscal year).
Balance Sheet Strength
Due to the copious amount of Free Cash Flow that the company generates, the company is able to
retain much of the retained earnings even after paying out dividends ($1.80/share) to shareholders.
retain much of the retained earnings even after paying out dividends ($1.80/share) to shareholders.
As at 31st May 2019 (FY2019), the company has Cash Equivalent amounting to $1.41b and another
$1.78 in Liquid Assets in their book. Net Cash stands at $3.1b, which is an increase of 14% over the
previous year.
$1.78 in Liquid Assets in their book. Net Cash stands at $3.1b, which is an increase of 14% over the
previous year.
Net Cash & Cash Equivalent has grown at a CAGR of 20.86% over 5 years period.
Valuation
From a valuation perspective, the company is not cheap but that’s because the company is still growing at mid double digit topline growth, which signals there is plenty of rooms to grow both organically and inorganically.
From an earnings perspective, an EPS of 2 cents/share translates into an earnings multiple of 61x with the saturation growth continues to rampant through their ambition target.
FCF yield currently stands at 4% with growth capex incorporated into it as the company has very little maintenance capex to cater to.
The company also has plenty of room to maneuver their capacity utilization rate so optimization of capacity will be in play for any organic growth the company is utilizing.
With the amount of cash they continue to generate, it is likely the management can embark on both their expansion plan and returning more cash to shareholders.
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