New Oriental's Turnaround Propels Stock

  • Analysts double buy ratings on the stock in seven months
  • Online, offline learning courses integration to boost growth

New Oriental Education & Technology Group Inc. is convincing investors and analysts that improvements in its after-school tutoring business and a push into online learning will help boost its pricing power in China’s for-profit schooling market.

The stock has soared 63 percent in the past 12 months after a series of better-than-estimated earnings reports helped turn around sentiment on the company that just a year ago was losing out to peers such as TAL Education Group. Analysts from Mizuho Securities to Jefferies Group LLC have followed suit, more than doubling the number of buy ratings to 11 from an eight-year low in August.

New Oriental is profiting from a renewed focus on after-school courses geared toward kindergarten-through-12th grade students, where parents are more willing to spend as it’s viewed as a ticket to prestigious universities. Chinese consumer spending on education, which traditionally emphasized language training and test preparation, is expected to reach $91 billion this year, a 7.4 percent jump from 2015, according to data from Euromonitor International.

“New Oriental is a market leader in China’s education market with a nationwide presence and reputable brand,” Tian X. Hou, founder of research firm T.H. Capital LLC, said by phone. “Now that their overseas test preparation business has stabilized, they’re expanding their reach to K-12 education, which has tremendous demand.”

The company’s turnaround plan is working. Student enrollment for its after-school tutoring business surged more than 30 percent in the three months through Nov. 30 from the same period last year, compared with a 4 percent increase in test preparation courses, New Oriental President Chenggang Zhou said on a conference call in January. That helped boost revenue 18 percent to $278.1 million in the period, putting sales on track to reach a record $1.45 billion in 2016, according to analyst estimates compiled by Bloomberg.

Management is also betting on its online courses, investment in other education companies and mobile apps to expand its reach beyond physical learning centers. Bridging these platforms would help boost enrollment growth, Chief Financial Officer Stephen Yang said on the conference call.

While analysts from Deutsche Bank AG and Nomura Securities Co. have highlighted the risk stemming from Internet cannibalization of New Oriental’s existing products, David Riedel, president of New York-based Riedel Research Group Inc., said online programs won’t erode margins as they help save costs on teachers and classrooms.

‘Pricing Power’

Investors may need more encouraging signs. Further slowdown in New Oriental’s English-language education business, especially in overseas test preparations, remains a major challenge for the company as it generates a steady stream of income, said Chiheng Tan, an analyst at Granite Point Capital Inc. in Boston.

Representatives from Beijing-based New Oriental didn’t respond to a request for comment.

The company is one of the best performers on a Bloomberg index of the most-traded Chinese stocks in the U.S. over the past year. The shares closed at $31.26 last week, up from low of $18.53 in September.

“There might be many part-time K12 English schools, but we believe New Oriental is still parents’ first choice,” said Riedel, who has a buy rating on the stock. “The strength of this brand has given them pricing power and the ability to expand.”

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