New Oriental Education: A Bet On Chinese Education

New Oriental Education (EDU) is seeing its share price break out higher as the company continues to experience strong growth trends in demand for Chinese education. As demand for higher education remains a priority in China, EDU is capitalizing on such momentum by offering expanded offerings and learning programs. Its share price is similarly trending higher, backed by improving fundamental results. I am buying stock in the name as investor optimism continues to be backed by its stronger fundamental operations.

Fundamental Narrative

As demand for education continues to expand in China, opening up opportunities for its students across the globe, EDU is expanding its operations, capitalizing on the momentum.

The company provides private educational services under the New Oriental brand in the People's Republic of China. It operates through Language Training and Test Preparation, Primary and Secondary School Education, Online Education, Content Development and Distribution, Pre-School Education, Overseas Study Consulting Services, and Study Tour segments.

They also offer test preparation courses to students taking language and entrance exams used by educational institutions in the United States, the People's Republic of China, and the Commonwealth countries; and after-school tutoring courses for middle and high school students to achieve better scores on entrance exams for admission into high schools or higher education institutions, as well as for children to teach English.

EDU continues its strong momentum in driving top line growth over the last quarter, with net revenues increasing to $618.1 million, representing 41.2% annualized growth. Strong top-line growth was driven by recent increases in student enrollments in academic subjects tutoring and test prep courses over the last two quarters. This is leading to strong results in terms of the enrollment in cash proceeds from students' registration, which grew year-over-year by approximately 40%, according to its earnings call.

The strong demand for education is being driven by students desire to explore different parts of the world, gaining opportunities abroad. These opportunities come into existence for students who can achieve high marks on entrance exams like the SAT or ACT. Strong demand for education is thus leading to rapid expansion for the company, who continues to open new locations. Over the last quarter, EDU added a net of 47 learning centers in 23 existing cities. They also opened two new schools in cities Lianyungang and Yancheng, while launching three dual-teacher model schools and eight learning centers in the cities of Jiaozuo, Dongguan and Haikou, according to management. Put together, its total square meters of classroom area by the end of the most recent quarter expanded by approximately 41% year-over-year.

Moreover, EDU continues to invest in its pure online education platform, Koolearn.com, which delivered a year-over-year revenue growth of approximately 63% in the most recent quarter, with registered users and paid users up by approximately 88% and 70% respectively. By investing in online technology, EDU is able to reach more students in remote locations who can't necessarily make it into a physical location. This is leading to increasing support in resources and a series of new initiatives being rolled out that is leading its online K-12 after-school tutoring business to experience robust year-over-year revenue growth of approximately 176%.

In order to capture the growth opportunities in lower-tier cities in China, EDU rolled out its dual-teacher model schools, while expanding its business into remote areas of China. The dual-teacher model is when a teacher in one location, usually a major city, offers a live lecture to students in remote areas while a tutor provides additional support from the physical classroom. They began to pilot the new dual-teacher model class in select cities in July 2016 and by the end the most recent quarter, they have deployed the new offering in over 35 existing cities, according to management.

Below is a chart of the company's revenue and earnings per share. EDU's growth trajectory has been spectacular since its inception. Revenue has gone from below $500 million, to now over $2 billion. Moreover, EPS has exponentially risen from under $0.40 per share, to now over $1.5 per share. The company is able to capitalize on strong demand for educational services within the country by boosting its top- and bottom-line results, potentially fueling further share price gains.

Price Action

EDU remains in a strong trend higher, even amid a recent consolidation. From 2016 to present, the company's share price is up nearly threefold due to explosive top- and bottom-line growth. Recent volatility in broader equity markets led to a pullback in the name, but its fundamental strength continues to lift it higher. EDU's breakout above the $100 level was significant, as this level had acted as resistance in recent months. With its stock resuming its uptrend backed by strong operational momentum, the rally could last over coming quarters.

Conclusion

EDU is breaking out higher as the company continues to experience strong growth trends. As demand for education remains a priority in China, EDU is capitalizing such momentum. Its share price is similarly trending higher, backed by improving fundamental results. I am buying stock in the name as investor optimism continues to be backed by stronger fundamental operations.

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Disclosure: I am/we are long EDU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.