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Located in China, Ambow Education Holding Ltd. (NYSE: AMBO) is a leading national provider of educational and career enhancement services, offering high-quality, individualized services and products. Despite its weak performance in August, I believe AMBO is a well-undervalued stock for the following reasons:

1) China overtook Japan as the world’s second-largest economy during the second quarter of 2010 in terms of gross domestic product (GDP), and that is expected to grow to over $20 trillion by 2014. According to IDC, total spending in China’s education market was $236.3 billion in 2008 and is projected to grow by approximately $604.1 billion by 2013. Because of the growth in the rapid economy and disposable household income, people in China are increasingly willing to invest in higher and professional education as it may lead to better career opportunities and enhanced earning power.

2) AMBO started its business with a clear mindset on focusing on the education training market. In the past ten years, AMBO has adhered to its goals and addressed two critical demands in China’s education market: the desire for students to be admitted into top secondary and post-secondary schools (Better Schools) and the desire for graduates of those schools to obtain more attractive jobs (Better Jobs).

“Better Schools” refers to the K-12 programs and tutoring services with a standards-based curriculum that enables students to improve their academic results and educational opportunities. According to IDC and CCID, AMBO is the largest ZhongKao and GaoKao after-school tutoring provider in China both in 2008 and 2009. Both administered in China, “ZhongKao” refers to high school entrance exams while “GaoKao” refers to university entrance exams. Like graduates from Ivy League schools in the United States, graduates from top universities in China may have a better chance to obtain quality jobs.

“Better Jobs” refers to the career enhancement services programs that facilitate post-secondary students in obtaining more attractive employment. They are offered through AMBO’s career enhancement regional service hubs, which are strategically located in key economic centers across China.

According to IDC and CCD, AMBO was the largest IT career enhancement training provider in China both in 2008 and 2009. Some key partnerships include Cisco Systems, Inc., Skillsoft Asia Pacific and McGraw-Hill Education.

3) Perhaps the biggest competitor for AMBO in China is New Oriental (NYSE:EDU). However, New Oriental only focuses on English and other foreign language training and providing consulting services to help students through the application and admission process for overseas educational institutions. Unlike New Oriental, AMBO focuses on targeted markets within the educational and career enhancement services market. Moreover, none of AMBO’s competitors can compete with its broad spectrum of programs, services and products.

4) AMBO has experienced substantial growth in net revenues and profitability in recent years. Its revenues grew from RMB 318.9 million in 2007 to RMB 902.0 million (USD $132.1 million) in 2009 at a CAGR of 68% over the last two years. Its net income grew from RMB 34.2 million in 2007 to RMB 138.0 million (US $20.2 million) in 2009 at a CAGR of 101% over last two years. In addition to organic growth, AMBO switched to new product sales in May 2008. Under this new business model, AMBO has no obligation to students or schools and has phased out its previous model of providing services to students of schools and centers that are not directly operated by AMBO. Under this new product sales model that alters sales to distributors, less net revenue per sale may be recognized, but higher gross margins are expected.

5) AMBO has built its Ambow brand and increased awareness of its products and services in a capital efficient way. AMBO has received numerous awards from notable organizations in China and is consistently ranked as one of China’s top ten education brands by industry leaders such as the China Daily Media Group, Tencent and Sohu.com. On August 11th, 2010, BusinessWeek announced its “50 Green Companies in China” award and AMBO was the only company from the education industry, while the other recipients included Intel (China), Coca-Cola (China), Shell (China), Ford Motor (China), Sony (China), etc. In my opinion it is remarkable to see that the education sector can also be green (i.e. low carbon).

“We believe that Green has become one of the key concepts in the development of AMBO’s educational systems over the last three years. Our intelligent system, which combines the learning engine and robust content, along with the use of IT management system has proved to be a good way to improve the efficiency of our educational services and consistent with Low-Carbon Economy,” said Yisi Gu, AMBO’s Senior Vice President and Chief Technology Officer (CTO).

6) The joint bookrunners for AMBO are J.P. Morgan Securities Inc. and Goldman Sachs (Asia) L.L.C. There used to be a quiet period after IPOs, and a Chinese wall rule prevented analysts working at those firms from speaking or writing reports for twenty-five business days from the listing. Once the period ends, more analysts will begin to add coverage for this stock and that will be an optimistic sign for AMBO.

AMBO currently has a P/E ~ 27 and P/B ~ 2.1, compared to New Oriental (EDU)’s P/E ~51 and P/B ~ 8.9, which offers a very attractive investment opportunity. As a significant part of AMBO’s growth strategy, AMBO has completed a number of acquisitions, and I believe AMBO intends to continue making strategic acquisitions and investments to help fuel future growth.

Disclosure: Author is long AMBO

Source: Six Reasons to Buy Ambow Education