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Educating The Chinese
Posted: Nov 16, 2009 06:56 AM by Sham Gad
One thing many people will agree on is that Chinese growth ambitions will involve increased education of the country's citizens. Even more so, China's one-child policy means that parents are able to allocate all of their resources to one offspring. And since most parents view education as the ticket to a better life in China, it might not be a bad idea to examine the companies that cater to this growing trend.
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An Ambitious Country
From 2004-08, post-secondary enrollment in China grew by 16% a year compared to 2% in the U.S. By 2020, estimates are that China's post-secondary enrollment will reach 40 million students compared to just over 20 million in the U.S. Also, the post-secondary penetration rate in South Korea is 91%, in the U.S. it's 82% and in China it's only 22 percent. The potential for Chinese growth in education is huge. Only 5% of China's population has a college degree compared to 27% in the U.S. (For more, see Investing In China.)
The big player among the publicly traded Chinese education stocks is New Oriental Education and Technology (NYSE: EDU), a $2.7 billion company that offers a range of educational programs like test prep, online courses and language training. New Oriental offers its services through a network of 48 schools and 222 learning centers in China. At $73, shares are not cheap, trading at 26 times forward earnings and nearly seven times book value.
Other Niche Players
A more focused name is ChinaCast Education (Nasdaq: CAST), currently the only U.S. publicly listed for-profit, post-secondary education service with fully-accredited universities in China. ChinaCast is akin to U.S. education companies like Apollo Group (Nasdaq: APOL). ChinaCast also offers a much more compelling valuation. Shares trade for $7.60, or $270 million and $2.40 in net cash per share. So far in 2009, net income was $12.6 million and the company is forecasting about $15 million for 2009. Based on the enterprise value of $184 million, shares are trading for about 12 times earnings. With sales and profits growing over 15% and 30%, respectively, the share price doesn't seem that expensive.
Another niche player is China Education Alliance (Nasdaq: CEU), which has a market cap of $125 million and enterprise value of $95 million based on cash of $31 million as of the most recent earnings release. The company is debt free. During that quarter, revenues and net income grew by 82% and 95%, respectively. Based on net income of $7.1 million for the first half of the year, assuming profits of $15 million for the year, shares are trading for about six times earnings. CEU offers educational services such as tutoring, test prep and English language training to students as young as age 7.
A Wonderful Future
China is wholeheartedly supportive of education. An estimated 1.3 billion Chinese are very ambitious and want to become more educated. That poses an excellent scenario for businesses that cater to this market. (For related reading, check out Top 6 Factors That Drive Investment In China.)
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By Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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