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  • 6 Ways to Invest in China’s Future Workforce 0 comments
    Sep 27, 2010 12:05 PM | about stocks: DV, APOL, EDMC, ESI, EDU, NED, ATAI

    By Michael Schmidt, CFA

    In the United States, there is no shortage of for-profit choices when it comes to higher education. Private universities, vocational and specialized training programs offer a broad variety of programs from technical, business, and the liberal arts. Companies like Devry Inc. (NYSE: DV), which has been in the private education business for nearly 75 years, and healthy competition from companies like Apollo (NASDAQ: APOL), Educational Management Corp. (NASDAQ: EDMC) and ITT (NYSE: ESI) have broadened awareness of the sector among investors. Each one of these companies operate profitably, have experienced impressive growth rates and all claim high placement results as they target what employers are seeking and tailor their programs as they go.

    As the private education market in the U.S. matures, becoming more crowded and competitive, the market in China is only starting to develop. Established Chinese companies like New Oriental Education Technology Group (NYSE: EDU) and ChinaCast Education Corp. (NASDAQ: CAST) and newly formed players like HQ Global Education Inc. (OTCPK:HQGE) and China Bilingual Technology & Education Group Inc. (OTCPK:CBLY) are benefitting from the demand for higher education and the desire to earn better wages.

    These companies vary in both their product lines and delivery systems, with some offering diversified product lineups and others targeting specific categories:

    • Children: Younger consumers from grade school to high school with a variety of programs including traditional education, online e-learning and targeted programs.
    • Vocational: As China develops as a consuming nation, and income and demand for foreign products rises, China remains one of the largest exporters of manufactured goods. Their relatively cheap labor pool has attracted many companies to build facilities in China to take advantage of the lower costs. Vocational training schools have sprouted up near both the source of the labor pools and their potential employers. These companies have the advantage of working hand-in-hand with employers to tailor their training programs to fit employers’ needs and claim placement rates as high as 100%.
    • Professional/Executive: As China becomes a larger force in the global economy, its professional and executive workforce is expanding as well. Companies are now offering programs geared specifically to advancing business skill sets including sales, marketing, negotiation and public speaking courses designed for and targeted to both seasoned and up-and-coming professionals.
    • Language: There is a higher interest for Chinese citizens to expand their language skills to be more competitive. Companies are taking note of this and delivering programs to teach language skills and prepare and assist students in their quest to study abroad.

    Here are six publicly held Chinese companies, each with their own history and strategy:

    HQ Global Education Inc. (OTCPK:HQGE): While incorporated a little over two years ago, HQGE has reportedly enrolled 85,000 students since its inception in 1994. The company provides vocational skills training and education to students in China and claims a 100% placement rate for its graduates due to the company’s targeted approach. HQGE locates its schools near sources of labor pools and their potential employers. They provide 60 programs, each ranging from 1-4 years, in 17 categories.   The HQ name carries some brand recognition, which the company plans to leverage off of as they expand their schools, enrollments and educational programs. This branding surrounds HQGE’s “Order-oriented Educational Mode,” which is essentially a form of target marketing to its customers, who in this case are both students and future employers. HQGE’s most recent reported financial results seem to coincide with its student growth trends, which are in the 17-18% range, with top-line growth and net income growing by around 20% in year-over-year nine-month reporting periods. This type of growth rate in any industry would be envied.

    China Executive Education Corp. (OTC:CECX):   CECX has a more niche defined target of executive education. The company targets its training and educational services to the successful and up-and-coming professionals who want to advance to new levels in what most U.S. business schools strive to provide beyond their traditional classroom topics. CECX offers proprietary courses in modern business practices, including but not limited to: public speaking, sales and marketing, negotiation and people skills. CECX is a relatively new company (officially formed in 2009) but has reportedly served over 2,000 students. While in its early stages and yet to survive a market cycle, its business model is nothing short of unique and specifically targeted at well-heeled customers. The company offers a much higher priced service to customers who can afford to pay up front to work with what CECX considers to be leaders in their field. This business model is similar to what some Executive MBA programs offer in the U.S. for working professionals, where the educational staff consists of working professionals alongside tenured professors. As China develops its professional leaders, there is a demand and desire for those who have worked primarily in China to learn advanced skill sets with a global focus.

    China Bilingual Technology & Education Group Inc. (OTCPK:CBLY): Newly formed from the acquisition of two companies that have been providing private education since the late 1990s, CBLY plans to expand its grade- and high school-level programs with a bilingual emphasis. The company plans to extend what it considers “high profile and high standard” state-of-the-art facilities with a high teacher-to-student ratio. China Bilingual’s experience and history of modern learning facilities have already proven effective, and the company reports college enrollment admission rates at 90%. China Bilingual has also won numerous awards for its results. While this newly formed company will need to prove itself as a publicly held company, with these achievements China Bilingual may be a strong competitor with a focus on high standards of education.

    ChinaCast Education Corp. (NASDAQ: CAST):  ChinaCast was founded in 1999 and employs approximately 2,200 employees in various locations across China and Hong Kong. The company delivers diploma and secondary degree programs at the university level. Its business is divided into both the traditional classroom settings on college campuses and online e-learning programs. Its on-site accredited programs are located at the Foreign Trade and Business College in Chongqing and the Lijiang College in Guangxi Normal University. Typical of any state or private university in the U.S., ChinaCast offers programs for language studies, advertising, business, hospitality, economics, computers, arts and music, IT and law.  With recent advances in computer technology and easy access to the Internet, ChinaCast has expanded its e-learning programs to enhance its product line beyond the traditional degree-based educational programs. Because of the reach of the Internet, they are able to extend these services to grade schools from k-12, local and national governments and some corporate facilities.

    Similar to other companies in this industry, ChinaCast is experiencing what would be considered high growth rates in top- and bottom-line growth. Some of this is from organic expansion and some through its strategic acquisitions like that of LJC in late 2009, which is projected to be accretive. Like any company in a growth stage, growing a business comes at a cost as top-line revenues grew last quarter above 40% while operating and net income grew at about half that pace but were still impressive. If this industry, like most at this stage, becomes a landscape of M&A and acquisitions, ChinaCast has one of the stronger balance sheets with significant cash on hand and has maintained impressive profit margins through a global recessionary period. 

    New Oriental Education Technology Group (NYSE: EDU):  Originally founded in 1993, EDU is one of the longer-standing leaders in this field and cemented a strong foundation early in the industry’s cycle.  EDU trades on the NYSE with a market cap of $3.4B and has been delivering impressive results to shareholders since it began trading. At over $100 per share and a P/E of around 50x, its success has been well recognized by investors as a company with a strong foothold in the education space. Like some of the other companies in this arena, EDU offers a diversified delivery system but focuses on language-based educational products consisting of multiple language courses, including English, Japanese, Spanish, French and Korean, to name a few. The company assists its students in preparing for admissions and assessment testing to help them move ahead of their peers. EDU delivers its products and services though primary and secondary schools in multiple formats and delivery systems including online e-learning, books, periodicals and CD-ROMs. In addition to its core business, EDU also offers consulting services to students seeking to enter other learning institutions, providing guidance on applications and the admission process for local and overseas institutions.

    EDU has continued to provide shareholders with impressive top- and bottom-line growth rates and deliver profit margins that any company would be proud to have. The recognition of these stellar growth and margin rates has not gone unnoticed by the investing community and is reflected in the strong demand for their shares. While there are at least nine analysts covering the stock with positive ratings, there is no shortage of commentary on why this stock needs to continue to deliver similar results to maintain the expectations and the valuation. EDU could be considered a model for newcomers to the industry who are also taking advantage of a high-growth business.

    China Education Alliance (NYSE: CEU):   One of the larger companies in the private educational landscape, China Education Alliance, Inc., generates over $30M in revenue, operates profitably on a net basis and trades on the NYSE with a market cap of approximately $130M. This is impressive for a company that was originally founded less than 7 years ago.  While operating in the private educational sector, their services span all age groups and educational areas from elementary to higher education and both vocational and professional areas. As with others in this space, CEU combines e-learning with on-site delivery. In addition to teaching, CEU provides product lines of study materials in print and audit formats and traditional and non-traditional testing services. One of its most profitable divisions is marketed under the Famed Instructors Test Paper Store, in which the company maintains and delivers a database of over 350,000 courses, test papers, study materials and exams. CEU has developed a diversified delivery service that includes networks of websites, on-site, magazine and newspaper outlets. There seems to have been a significant amount of planning and development since their inception to be able to be a sort of one-stop shopping center of education of all sorts.

    Similar to other private educational companies in China, CEU is in a rapid growth phase. Over the recent six-month period ending June 30, 2010, CEU experienced revenue and net income growth rates at or above 20% with the largest growth in the company’s training center and online delivery systems, where its margins are higher. Because of dilution from an almost 50% increase in outstanding shares, their EPS increased at about half of their revenue and net income growth rates, yet was still impressive. From a forward-looking capital picture, CEU has maintained a healthy balance sheet with approximately $75M in cash, has no long-term debt on its books and has increased shareholders’ equity over the last 12 months. CEU trades approximately 100k shares on the NYSE each day, trading at a relatively low multiple to its peers and the general market.

    While each of these companies is experiencing very impressive growth rates, the business of education in China is competitive and reputation is important.  As with any industry in rapid growth stages, companies must choose at some point to compete on price or product differentiation. Some of these companies have chosen to target specific areas of the market while others are choosing a diversified product line. For now both the established and newly formed companies are delivering results that shareholders are looking for and profit margins any company would die for.  For those private education companies in China that make the right choices, remain flexible as the market changes and capitalize on controlling costs as they grow, there could be a bright future ahead.

    Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.



    Disclosure: HQGE, CECX and CBLY are Clients of RedChip.
    Stocks: DV, APOL, EDMC, ESI, EDU, NED, ATAI
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