Online Education Grows At New Oriental, TutorGroup

Includes: EDU
by: Doug Young

Online education is making headlines today with word that the fast-growing TutorGroup has received major new funding, while the more established New Oriental (NYSE: EDU) is splitting off its web-based unit in what looks like a possible prelude to a separate public listing. Both pieces of news highlight the huge potential of online education in China, drawing on the country's Internet population of more than 600 million web surfers and its voracious appetite for education services. Online education is not only accessible to millions of Chinese in smaller cities where many big players lack a presence, but is also far more cost-efficient than traditional classroom facilities like the ones that form the backbone of New Oriental's core educational services business.

Let's start with New Oriental, which was once an investor darling but later became a stock market laggard due to its slowing growth amid stiff competition in China's education market. The company's shares tanked after an investigation by the U.S. securities regulator in 2012, but bounced back and rose 50 percent last year amid a rally for New York-listed Chinese companies. Still, a broader lack of investor appreciation led New Oriental's chief executive to hint last year that he might consider privatizing the company amid a wave of similar moves by undervalued New York-listed Chinese firms.

Now the latest media reports say the company has spun off its online business into a separate company called Beijing New Oriental Xuncheng (English article). The business still accounts for a relatively small portion of New Oriental's overall revenue, but it plans to invest heavily to build up the unit. If New Oriental can quickly expand the business and post strong profits, I would expect we could see a separate listing for the company in the next 2-3 years and possibly a concurrent privatization of the bigger, slower growing parent.

Meanwhile, TutorGroup, an online provider of English language education, is making its own headlines with word that it has just received $100 million in new funding from a group led by e-commerce giant Alibaba (company announcement). The new investors also include Singaporean sovereign wealth fund Temasek, as well as China's own Qiming Venture Partners. Alibaba made a more broad move into the education services sector last year, when it launched a platform called Tongxue specifically dedicated to offering third-party education services (previous post).

I'm unfamiliar with TutorGroup, but the company says it has been in business for 10 years and now operates in 40 countries. It said it will use the new mega-funding to accelerate its growth across Asia, and also to expand its presence in the Americas. In addition to offering English language classes, the company is also hoping to tap demand for Mandarin as China's influence grows on the global stage.

There's no indication in its announcement of whether TutorGroup is profitable or how much revenue it earns. But its rapid expansion and the fact that it has received this new investment both seem to indicate it is losing money as it targets growth over profits. I would expect its revenue is probably growing quickly, at high double-digit or even triple-digit rates, and its revenue is probably currently at an annual level of $200 million or more.

So what's next for TutorGroup and New Oriental's newly spun-off online unit? As I've said above, I do think New Oriental will invest aggressively in its online company over the next few years in a bid to bring some excitement back to its stock, and could even try some overseas initiatives through the unit. TutorGroup is likely to expand aggressively with its new funding, and also to work hard at becoming profitable. If it can do both successfully, I could see an offshore IPO for the company as early as sometime next year.

Bottom line: New Oriental will invest aggressively in its newly spun-off online unit in the run-up to an eventual separate listing, while TutorGroup could list as soon as next year following its major new funding.

Disclosure: No positions