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China education IPO: compare Ambow (AMBO) to New Oriental Ed (EDU)

VALUATION RATIOS                    
                                IPO Mrkt     Price /   Price /     Price /     Price /
                                Cap (mm)   Sales    Earnings BookVue TngBV
NewOrientalEd (NYSE:EDU)    $3,770     6.7         34           6.3        6.4
Ambow Ed (NYSE:AMBO)          $783     4.1         27           2.1        5.3

See IPOreport for AMBO for projection assumptions

. Rapidly growing China-based education company offering a broad spectrum of services
. Cisco is a corporate partner & investor.  Other corporate partners include Skillsoft & McGraw-Hill
. At price range mid-point the projected P/E multiple is 27, see IPOreport for assumptions
. Virtually no debt, less than $11mm, unlike most US companies

 A leading national provider of educational and career enhancement services in China.
Business addresses two critical demands in China’s education market,
. The desire for students to be admitted into top secondary and post-secondary schools,
. The desire for graduates of those schools to obtain more attractive jobs.
4,017 employees

Better Schools: includes K-12 schools & tutoring (70% if March qtr rev)
Better Jobs: includes colleges & career enhancements (30% of March qtr rev)
For the year ended December 31, 2009 Better Schools accounted for 55% and Better Jobs accounted for 45%
AMBO expects the mix of net revenues between Better Schools and Better Jobs to fluctuate

According to CCID, AMBO is the best positioned company in both the IT training market and the ‘ZhongKao and GaoKao’ after school tutoring markets in 2009 in terms of market positioning and growth capabilities.
IT market
According to IDC, market share of the top five players in the IT training market was 28.9% in 2008
After school tutoring market: ‘ZhongKao and GaoKao’
. IDC predicts that by 2013 the ZhongKao and GaoKao market will grow to RMB $18 billion, with five-year compound annual growth rate (OTCPK:CAGR) of 9.1% during 2008-2013
. The market share of the top five players in the ‘ZhongKao and GaoKao’ after school tutoring markets is 0.93%.
. Also according to CCID, AMBO is the ZhongKao and GaoKao market leader, in a very fragmented market

. As of March 31, 2010, had more than 30,000 students enrolled in K-12 schools and colleges
. Since the beginning of 2008, have had in the aggregate more than 950,000 student enrollments in tutoring and career enhancement centers.

The number of student enrollments is largely driven by the
. Demand for the educational programs offered by AMBO’s K-12 schools, tutoring centers, colleges and career enhancement centers,
. Amount of fees AMBO charges
. Effectiveness of AMBO’s marketing and brand promotion efforts
. Locations and capacity of AMBO’s K-12 schools, tutoring centers, colleges and career enhancement centers
. AMBO’s ability to maintain the consistency and quality of teaching
. AMBO’s ability to respond to competitive pressures & seasonal factors.
. In 2008 and 2009, AMBO’s K-12 schools had student enrollments that were above 85% of the aggregate capacity of the schools.
. Total capacity at AMBO’s K-12 schools in 2008 and 2009 was 20,420 and 22,900 students, respectively
. In 2008 and 2009,AMBO’s two colleges, Applied Technology College and Beijing Century College, had government-imposed annual enrollment quota limits of an aggregate of 3,499 and 3,409 students, respectively.
. The total new student enrollments in 2009 at Applied Technology College and Beijing Century College were an aggregate of 3,499 and 3,350, respectively.

Includes online and offline delivery models
. Regional service hubs include five K-12 schools, 96 tutoring centers, two colleges and 16 career enhancement centers as of March 31, 2010,
. Combined with distributors, enable AMBO to provide services and products to students in 30 out of the 31 provinces and autonomous regions within China.

Cisco Systems, Inc.
. AMBO’s partnership with Cisco began when Cisco invested in AMBO in 2006. Since CISCO’s investment, AMBO has entered into agreements and worked with Cisco China in two principal areas—training of their channel partners and development of information technology talent.
. AMBO’s educational model helps Cisco manage the effectiveness of its channel partners by tracking their ability to sell and support Cisco products.
. The development of information technology talent is accomplished through a workforce transformation program targeted at universities to increase the networking talent pool in China.
Skillsoft Plc
. In April 2008, AMBO reached an agreement with Skillsoft Asia Pacific to serve as its exclusive distributor in the Chinese market until December 31, 2013.
. Skillsoft is a provider of e-learning and performance support solutions for global enterprises, government, education and small to medium-sized businesses.
. Under our agreement, AMBO partners with SkillSoft to represent and offer SkillSoft’s e-learning solutions and resources to corporate training clients and students in career enhancement centers.
. AMBO also provides localization for SkillSoft’s e-learning solutions, including SkillSoft’s IT Courseware Library, Business Skills Course Collection, KnowledgeCenters and Environmental Safety & Health Course Collection.
The McGraw-Hill Companies, Inc.
. In November 2009, AMBO entered into an agreement with McGraw-Hill Education to develop enhanced, customized English Language Training courseware and training for IT engineers in AMBO’s career enhancement centers.
. Will be offered in a blended format that includes online and group activities focusing on career-specific English that engineers use in their jobs. McGraw-Hill and Ambow also will provide training for the program’s instructors.

The business is subject to seasonal variations.
K-12 schools & colleges
. Historically, tuition fees received from K-12 schools and colleges are lower during the first quarter due to school closures in January or February for Chinese New Year and winter vacation & during the third quarter due to summer vacation.
The tutoring segment is affected by seasonal variations in the first quarter due to Chinese New Year and winter vacations
Career enhancement
Is affected by seasonal variations in the first and third quarters due to Chinese New Year and summer vacation, though this seasonal impact is to a lesser extent than the impact on the K-12 schools and colleges.

The educational and career enhancement services market in China is rapidly evolving, highly fragmented and competitive, and we expect competition in this sector to persist and intensify.
. AMBO faces direct competition in each geographic market and each business segment in which it operates, though no single competitor operates in all of business segments.
. Competition in K-12 schools is from both public and private schools, and in our tutoring programs from other private companies.
AMBO offers a broad spectrum of services
. To date, AMBO has not faced significant, direct competition in career enhancement centers, but other companies have begun to enter this market. Other than New Oriental, AMBO believes that none of its competitors focuses on as broad a spectrum of programs, services and products as AMBO provides.
. Instead, competition focuses on targeted markets within the educational and career enhancement services market, both in terms of the particular segments of students they aim to attract and the local markets in which they operate.

From sale of 7.5mm ADSs.  Shareholders intend to sell 3.18mm ADSs
. US$20 million for working capital and general corporate purposes, including teaching training programs and for research and development of educational content
. US$50 million for the expansion of the business. Of the proceeds expected to be used for the expansion of the business, currently anticipates that US$30 to US$40 million would be used for strategic acquisitions with the remainder to be used for upgrades and expansions to existing schools and learning center

See IPOreport for AMBO for projection assumptions

Disclosure: none