New Oriental Surges Most Since 2012 on China Tutoring Outlook

Updated on
  • Company posts 16% growth in quarterly sales, beats estimates
  • Chairman says education spending resillient in China downturn

New Oriental Education & Technology Group, China’s largest private education provider, rose the most in more than three years after reporting better-than-estimated earnings amid a robust growth outlook for the country’s tutoring industry.

The American depositary receipts surged 8.7 percent to $24.98 at the close in New York on Tuesday, the biggest gain since July 2012. The company said sales for the three months ended in August increased 16 percent compared with a year earlier and forecast second-quarter revenue above analysts’ forecasts. Chairman and founder Michael Minhong Yu said spending on education remains “resilient” even as China’s economy slows. A Bloomberg gauge of the most-traded Chinese companies in the U.S. slid 0.2 percent.

New Oriental, which began with programs helping students prepare for overseas study tests, has shifted its focus to K-12 tutoring with revenue from this business area rising 29 percent in the last quarter from a year ago and enrollment jumping 13 percent. The stock has rallied 35 percent since a September low while Goldman Sachs Group Inc. last week upgraded it to the equivalent of hold from sell, citing expectations for the government to announce “positive policies” for education in its five-year plan as soon as the end of this month among other factors.

Innovative Strategy

“Management has an innovative strategy to migrate English-only students to encourage them to go into the K-12 program that can prepare them for English, as well as other courses,” Leon Chik, a Hong Kong-based analyst at JPMorgan Chase & Co. who rates the shares a buy, wrote in a note on Tuesday. “K-12 revenues are more stable and offer more sustainable growth than a pure English-focused program.”

Uncertainty about China’s economy and increased stock market volatility have encouraged parents to spend more money on education to prepare their children for tougher competition on university entrance exams, Yu, a former English teacher at Peking University who founded New Oriental in 1993, said on a conference call with investors Tuesday.

“A softening Chinese economy is actually contributing a bit to our ongoing business recovery which is a part of the opposite of what people would normally expect,” he said. “When the economy is slowing down, they tend to enter into protection and preparation mode.”

Sales Growth

China’s gross domestic product rose 6.9 percent in the third quarter, the National Bureau of Statistics reported on Monday. It was the weakest quarterly expansion since 2009 and below the government’s target of 7 percent for this year.

New Oriental’s sales rose 16 percent for the quarter to $458.5 million, exceeding the $448.5 million average projection of four analysts surveyed by Bloomberg. The Beijing-based company forecast that revenue will increase as much as 15 percent to $271.1 million in the three months ending in November. That is the first time in a year that the company’s quarterly sales guidance exceeded analysts’ projections, according to data compiled by Bloomberg.

Other Chinese education providers also rose in New York trading. TAL Education Group gained 1.3 percent to $37.30, while Tarena International Inc. jumped 2.3 percent to $9.93.

— With assistance by Gilbert Xu

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