New Oriental Gains as China Tutoring Expansion Boosts Outlook

Updated on
  • Education company's quarterly sales beat analysts' projections
  • Company has no plans to go private, CFO says on earnings call

New Oriental Education & Technology Group rose in New York as a jump in after-school tutoring enrollments boosted the growth outlook for China’s largest private education provider.

The American depositary receipts climbed 0.6 percent to $23.75 on Tuesday after surging as much as 5.4 percent. The company reported sales for the quarter ended in May that exceeded analysts’ average estimate, while Chief Financial Officer Stephen Yang said there are no plans to take pursue a going private process. A Bloomberg gauge of the most-traded Chinese companies in the U.S. advanced 1.1 percent to the highest in two weeks.

New Oriental, which began with programs helping students prepare for overseas study tests, has shifted its focus to K-12 tutoring. Enrollments for academic courses in the three months through May jumped 57 percent from a year earlier to contribute to about half of the company’s total revenue, according to the earnings statement. That compared with a 35 percent increase in all course registration. The company plans to open 30 to 40 after-school learning centers in the upcoming year and enter three to four new cities, CFO Yang said on a conference call Tuesday.

“New Oriental’s tutoring service for middle- to high-school students is a bright spot of its business, growing at the fastest pace among all segments,” Tian X. Hou, the founder of research firm T.H. Capital LLC, said by phone from Beijing. “Its guidance on expanding by adding new learning centers, which is very important for its outlook, looks positive and boosts investors’ confidence.”

Revenue Growth

Sales rose 14 percent for the quarter to $328.8 million, exceeding the $327.5 million average projection of six analysts compiled by Bloomberg. The Beijing-based company forecast that revenue will increase as much as 16 percent to $457 million in the three months ending in August.

Lower development costs for online services and K-12 tutorial enrollment growth will be key drivers for New Oriental’s sales growth and margin expansion in the fiscal year 2016 that began in June, JPMorgan Chase & Co. analysts led by Leon Chik wrote in a note on Tuesday. They raised their target price for the stock by 6.5 percent to $33.

New Oriental has no privatization plans and will focus on creating value for shareholders in the long run, Yang said on the call. More than 20 U.S.-listed Chinese companies have received buyout bids this year as higher valuations on China’s domestic market lured businesses to return.

Companies on the Bloomberg China-U.S. Index have advanced this year as a rally in mainland stocks spread to peers trading in New York and speculation about more going-private offers fueled gains. The gauge rose to a record on June 12. New Oriental has gained 16 percent in 2015.

Even so, ADRs of New Oriental are trading at 14.7 times projected 12-month earnings, the lowest among five peers, which have an average multiple of 26.2, according to data compiled by Bloomberg.

The Bloomberg China-U.S. Index climbed to 126.54. The Deutsche X-trackers A-Shares Exchange-Traded Fund added 1 percent to $42.99. The iShares China Large-Cap ETF tracking Hong Kong shares climbed 0.4 percent to $42.75.