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Many multi-national firms operating in China from L’Oreal to GM have complained about the lack of qualified talent at the junior and mid-level managerial levels which leave them unable to scale their operations. Although there are many Chinese youth looking for jobs, too many of them have not been equipped by China’s university system with the tool kits needed to thrive in a fiercely competitive corporate world.

Vast and Eager Market
Investors should heed these laments accordingly and look at the stocks of education and training companies in China that cater to this lucrative segment. Parents and grandparents will pay for their little emperors to get business skills training in order to get a step up in the job hunt, especially when one considers that many parents view their kids as their safety nets rather than China’s creaking pension system.

Recent graduates will also pay to improve their English or business skills, as they believe that they must do so in order to get promoted or find a higher paying job. My firm, the China Market Research Group CMR, conducted a survey in Shanghai and found that over 15% of recent graduates were willing to spend over 10% of their monthly disposable incomes on training courses.

New Oriental (EDU)
, whose stock has skyrocketed since its recent IPO, hands down has one of the best business models I have ever seen in China and is a stock that investors should track. I wish that I had been able to invest in the company when I was still Chief of Research of venture capital firm, Inter-Asia Venture Management.

The company is highly scalable as they prepare students to take tests, learn English, and get trained in a host of subjects. They have the brand name and reputation that will continue to attract students. As one Chinese student who was studying in America said to me on why he returned to China in the summers to learn English at New Oriental, “The classes are targeted better for me here. I feel I can learn English better at New Oriental in Beijing than in college in Massachusetts.”

Health Club vs. University

Unlike the Wall Street Institute and other training companies that rely on fancy forms of technology, charge high amounts up front and leave students to attend classes on their own time – the health club model – New Oriental has more specific times for classes and often has hundreds of students to one teacher.

Although New Oriental has high student-teacher ratios, the model works because many of the courses are focused on test preparation, which does need small class sizes. Students can quantify the quality of New Oriental’s preparation by seeing if their test scores improve.

Conversely, the Wall Street Institute’s business model in China has left legions of unhappy customers. How many people do you know who have paid for 1 year or 3 year memberships at health clubs actually go for the entire time? Same thing happens with the Wall Street Institute and similar companies, especially when one considers that they are targeting wealthy and busy business executives. The result – graduates who don’t feel they got their money’s worth, which counteracts any marketing efforts.

Many investors have asked me about the Princeton Review in China, who has made few inroads in China despite trying for many years. Unlike New Oriental, which targets Chinese students and the masses at a couple of hundred USD per student, Princeton Review has elected to go upscale and charges high amounts for its training much as Wall Street Institute has done, anywhere from $2000-$10,000 USD. Unlike Wall Street who targets wealthy Chinese, Princeton Review derives a considerable bulk of their revenues from tutoring the children of expatriates who are preparing to apply to university in the US.

There are so many Chinese who want to get trained but cannot spend the several thousand USD fees that Wall Street Institute and Princeton Review charges. Just look at the number of Chinese going to the US to study. I went to Harvard for graduate school and focused on China’s economy. Aside from Americans, there were more Chinese than students from any other nation in my incoming class at Harvard’s Graduate School of Arts and Sciences.

Many of these students who come to the US took courses at New Oriental. Although China’s rich are getting more numerous which leaves a huge market for luxury product companies, I would rather target the fast-growing middle class for education and training related opportunities.

Sustainable Business Model

Although New Oriental’s stock has skyrocketed, leaving me worried about the volatility of the share price in the short-term, I do believe New Oriental’s business model will remain solid.

The stock is one that investors should strongly look at once the frothy post-IPO dance slows to a waltz a bit. Many of the investors are the growing number of overseas Chinese who are now in America, having used New Oriental to help them get there in the first place. Others are hedge funds that want some China exposure that are trying to get in and out and take their gains.

Unlike some of the other Chinese IPOs that are built more on hype than sound business sense, New Oriental is a company that is here to stay.

EDU 2 day chart:

Shaun Rein is the Managing Director of the China Market Research Group CMR, www.researchcmr.com, a firm that that helps American and European companies expanding or entering China get the market intelligence needed to make smarter decisions in China.

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Source: China IPO- New Oriental: Training China's Eager Middle Class