Highlights from Chinese Education Provider New Oriental's IPO Filing

New Oriental Education and Technology Group, China's largest provider of private education, filed an F-1 with the SEC on Tuesday. Excerpts from the prospectus are highlighted below:

Proposed Symbol: (EDU)

Underwriters: Credit Suisse, Goldman Sachs, Piper Jaffray

Offering:The company is offering 7.5 million ADSs at an offering range of $11-13 million. At midrange, the total raise would be $90 million. The underwriters have an option to purchase an additional 1.125 million ADSs after the IPO.

Business Overview:

We are the largest provider of private educational services in China based on the number of program offerings, total student enrollments and geographic presence. We offer a wide range of educational programs, services and products consisting primarily of English and other foreign language training, test preparation courses for major admissions and assessment tests in the United States, the PRC and Commonwealth countries, primary and secondary school education, development and distribution of educational content, software and other technology, and online education. We provide educational services under our “New Oriental” brand, which is the best brand in China’s English language education market according to a report published in June 2005 by the Social Survey Institute of China, or SSIC, a leading social survey and research firm in China. We believe our “New Oriental” brand is the leading consumer brand in China’s private education sector, as evidenced by awards we received from many national print and online media sources in China, including the “Most Influential Education Brand in 2005” from Southern China Metropolitan Daily, a newspaper with nationwide circulation, and the “2004 Top Ten Largest Private Educational Organizations in China” from China Fortune, one of the leading finance journals in China .

Since our inception in 1993, we have had over three million cumulative student enrollments. In the fiscal year ended May 31, 2006, we had over 872,000 student enrollments, including approximately 497,000 student enrollments in our language training programs and approximately 375,000 student enrollments in our test preparation courses. We deliver our educational programs, services and products to students through an extensive physical network of 25 schools, 111 learning centers and 13 bookstores operated by us as of May 31, 2006, over 5,000 third-party bookstores and approximately 1,700 teachers in 24 cities, as well as through our virtual online network, which has approximately two million registered users.

Financial Highlights: Net revenues for the fiscal years ended May 31, 2004, 2005 and 2006, were RMB441.8 million, RMB643.3 million and RMB770.3 million (US$96.1 million). Educational programs are the primary source of revenue (97.4%, 94.3% and 93.7% respectively in each of the three years) and books and others (2.6%, 5.7% and 6.3%).

Operating costs have comprised 89.6%, 82.7% and 91.7% of revenues in the years 2004-2006. Selling and marketing costs were in the 8-10% of revenues range, and the remainder is split between cost of services (teaching fees, performance-linked bonuses paid to teachers, rental payments and book publishing costs) and G&A. Net income for 2006 was $6.2 million.

At the end of May 2006, the company had just under $33 million of cash, $12.8 million of long term debt.

Use of Proceeds: The company plans to use $18.5 million to repay outstanding debt, $20 million for expanding its network of schools and the rest for working capital and general corporate purposes.

Competition: There are no pure-play public comps for the company. Some overlapping services are offered by private companies including Global IELTS, Wall Street Institute and English First. Additionally, particularly with distance learning, the Princeton Review (REVU) and Kaplan, a wholly owned subsidiary of the Washington Post Company (WPO) are potential competitors.

Management:

Mr. Michael Minhong Yu is the founder of our company and has served as the chairman of our board and our chief executive officer since 2001. He also serves as vice chairman of the Beijing Young Entrepreneurs Association and vice chairman of the Committee of Education of the Central Committee of the China Democratic League. Prior to founding our first school in 1993, Mr. Yu was an English instructor at Peking University from 1985 and 1991. Mr. Yu received his bachelor’s degree in English from Peking University.

Employees: At the end of May, the company had 2,559 full-time employees and 1,488 contract teachers.

Ownership: After the offering, the CEO will hold 31.18% of the company. Tiger Global Private Investment Partners will hold 14.91%, and 15% will be held by three additional entities: Capital River Group, which holds shares for 300 company employees; Peak Idea International and Forthright Training, both held by otherwise unnamed individuals.

Regulatory Environment: The education market in China is heavily regulated; this has received substantial recognition in the prospectus. A taste:

PRC laws and regulations currently require any foreign entity that invests in the education business in China to be an educational institution with relevant experience in providing educational services outside China. Our Cayman Islands holding company is not an educational institution and does not provide educational services. In addition, foreign ownership of primary and middle schools for students in grades one to nine is prohibited in the PRC. Accordingly, our wholly owned subsidiaries in China, which are considered foreign-invested, are currently ineligible to apply for the required education licenses and permits in China.

We conduct our education business in China through contractual arrangements with New Oriental China and its subsidiaries and shareholders. New Oriental China is our consolidated affiliated entity directly owned by our founders and/or their respective affiliates. New Oriental China’s subsidiaries hold the requisite licenses and permits necessary to conduct our education business and operate our schools, learning centers and bookstores in China. We have been and are expected to continue to be dependent on New Oriental China and its subsidiaries to operate our education business until we qualify for direct ownership of educational businesses in China. We have entered into contractual arrangements with New Oriental China and its subsidiaries, pursuant to which we, through our wholly owned subsidiaries in China, provide exclusive teaching support, new enrollment system support and other services to New Oriental China and its subsidiaries in exchange for payments from them. In addition, we have entered into agreements with New Oriental China and each of the shareholders of New Oriental China, which provide us with a substantial ability to control New Oriental China and its existing and future subsidiaries.

Comments

[Doug Roberts:]

Hi -
Why would investing in New Oriental China return better results than REVU returns? REVU has found this market difficult - and for a long period of time. What makes New Oriental different?

Doug Roberts

2006 Aug 24 02:42 PM

[viviana wang:]

i used to go to new oriental school. as far as i know ,new oriental 's like a faith to chinese student. it's like if u want to learn real english,if u want to go abroad,go to new oriental school.all the student trust that ,according to all the facts.
the truth is the teacher's really good,helpful,and they teach u such skills to pass the test,such as toefl,gre,sat......
i don't know REVU as u don't know new oriental,but in china,new oriental 's for a long time attractive for all the student.

2006 Sep 06 07:49 AM

[User 139645:]

I TOTALL AGREE. NEW ORIENTAL SCHOOL HASE BEEN A GREAT SCHOOL. I

2008 Jan 14 09:06 AM

[User 139645:]

I TOTALLY AGREE YOU. NEW ORIENTAL HASE BEEN A GREAT PLACE .

2008 Jan 14 09:08 AM