Noah Education Holdings: A Promising Chinese IPO

| About: Noah Education (NED)

Based in Shenzhen, Noah Education Holdings (NYSE:NED) is a leading provider of interactive educational content in China. The company provides interactive multimedia education content to accompany Chinese textbooks on a broad range of subjects of multimedia learning materials, covering an array of subjects to complement China's primary and secondary schools.

Content is primarily delivered through handheld digital learning devices or DLDs (small consoles with a screen and keypad for interacting with media) into which its content is embedded or downloaded at the point of sale at download centers including more than 10,000 outlets such as Noah-branded stores, book and electronics stores and mall kiosks, or on the company's Web site.

As of June 30, 2007, the Company had developed approximately 28,000 multimedia courseware titles. Most of the content is licensed from Chinese and foreign publishers, including Oxford University Press. Half the courses are for learning English and all of the company's courseware titles are presented in multimedia and interactive form, combining texts, graphics, audios, visuals and animations.

Noah Education Holdings also sells electronic dictionaries and has licensed and compiled over 150 of them out of which, 16 dictionaries related to the English language, 10 dictionaries related to other foreign languages and over 120 professional dictionaries on subjects of medicine, law and engineering.

Portions of these dictionaries are presented with colorful interactive animations, dialogues and explanatory graphics.

In July of fiscal '07, the Company began offering after-class tutoring programs covering subjects such as Chinese, mathematics, English, physics and chemistry. With more than 900 employees Noah's main customers are children between the ages of 5 and 19.

Key Points

A good education has always been highly valued in China, since it ensures not only the future and development of the individual but also the family and the country as a whole. Starting with basic education China has gained tremendous achievements, especially in the last decade.With the adoption of the policy of reform and opening to the outside world, basic education has entered a new era of progress which includes pre-school education, primary education and regular secondary education.

In 1986, the Chinese government promulgated "The 9-year Compulsory Education Law of the People's Republic of China", placing basic education in the country on a firm legal basis and further laying down the principle that local governments should be responsible for basic education. To meet this requirement, a child may either attend five years of primary education followed by four years of secondary education or six years of elementary education followed by three years of secondary education.

In June 1999, the CPC, Central Committee and the State Council jointly promulgated the "Decision on the Deepening of Educational Reform and the Full Promotion of Quality Education", clarifying the direction for the establishment of a vital education with Chinese characteristics into the 21st century. In 2002, there were 111,800 kindergartens with an enrollment of more than 20 million young children.

By the end of the same year, there were altogether 456,900 primary schools with an enrollment of well over 121 million students for a net enrollment rate of primary schools reaching 98.58%.

The Chinese Ministry of Education announced that it plans to increase compliance with the nine year compulsory education to 100% of all school age children by 2015, up from 99.3% and plans to extend the period of compulsory education from nine years to twelve years between 2020 and 2050. To enhance the management and guidance of kindergartens, the state has formulated a serious of regulations, placing the management of kindergartens on scientifically sound and institutionalized basis.

Key Facts

According to reports, the gross domestic product of China grew from $1.45 trillion in fiscal '02 to $2.77 trillion in fiscal '06, representing a compound annual growth rate [CAGR] of 17.4%. This growth is expected to continue and accelerate, potentially reaching over the $6 trillion mark by fiscal 2011 and in the process representing a CAGR of 17.2% from 2007 to 2011.As a result of this economic growth, disposable income per capita in China has increased at a CAGR of 6.7% from '02 to '06 and is expected to increase even further, at a CAGR of 8.3% from 2007 to 2011.

This particular increase will most likely have an impact with the Chinese families, which are generally willing to invest a substantial amount of their financial resources in their only child's education. China still has in place its compulsory "single child" policy on its population.

Based on favorable economic conditions China is currently experiencing and the importance and priority factor that the Chinese government has placed on the education system as well as the development of education which leads to a form of evaluation that becomes the means by which the Chinese society bases its progression and aspirations' NED (Noah Education Holdings), besides bringing a different learning dimension to China's basic education, is also uniquely positioned in the industry as a leader and innovator to significantly expand its business and be profitable in the process.

Investment Analysis

Noah Education Holdings' revenues have increased from $25.2 million in fiscal '05 to $49.10 million in fiscal '06 with a current $72.8 million posted in fiscal '07. Gross profit %-wise rose from 13.9% to 21.8% and 35% , fiscal '05,'06 '07 respectively. The company has $10.2 million in total cash from $7.5 million during fiscal '06. Total current assets stand at over $40 million from $36.9 in fiscal '06. $30.7 million in total equity from $29.4 as of fiscal '06. One year sales growth stands at 48.4% with one year net income growth of 162%. Net income came in at $8.8 million compared to $3.5 million a year ago, constituting an increase of 149.4% for the year ended June 30, 2007. Net profit margin %-wise 12.0%, 6.8% and 18.6%, fiscal '05,'06,''07 respectively.

Deutsche Bank Securities is listed as the lead underwriter for the offering. The company plans to offer 9.8 million ADRs at a price range of $9.80 to $11.80 per ADR. CIBC World Markets, Thomas Weisel Partners LLC and First Shanghai Securities are also listed as underwriters.

This IPO is recommended as a buy.

Disclosure: Author intends to own shares of Noah Education Holdings