ChinaCast Education: Undiscovered, Undervalued, Underplayed

| About: ChinaCast Education (CAST)

Editor's note: On October 26, the day after this article was published, ChinaCast Education announced the transfer of shares from the OCT to NASDAQ and is now trading under the ticker symbol CAST.

Chinacast Education (OTC:CEUC) provides e-learning and training services in three main education segments: post-secondary, K-12 and vocational/career. These services include interactive distance learning applications, multimedia education content, educational portals and vocational/career training courses. Their stated corporate goal is to become "China's Apollo, Strayer, DeVry, etc." (see recent management presentation in Edgar archives).

The company currently trades on the OTC but applied for a Nasdaq listing in July, 2007, and says they expect to receive that listing in Q4 of this year. Some key shareholders in the company include Hughes Network Systems (13%), Intel Capital (9%), and management (24%). You may be familiar with a recent IPO in this sector, Noah Education (NYSE:NED), which priced at $14 last week and traded to $23 on opening day.

There are compelling growth statistics in all segments of the China education market that are served by Chinacast (k-12, post-secondary, vocational/career). For example, in 2005 the People's Republic of China had over 100 million university-qualified applicants, but only 15 million physical seats. Also in 2005 the PRC had about the same number of post-secondary students as the U.S. (about 16 million), but less than half the number of schools (4182 U.S., 1792 PRC). English language training and online training is also in high demand in China due to limited school budgets and much higher salaries for skilled English speaking job seekers.

Venture capital is now flowing more rapidly into the education market in China, as cited in this recent ChinaDaily article:

China's VC and PE markets see monthly new high

By Hao Zhou ( Updated: 2007-10-22 15:37

Both the venture capital [VC] and private equity [P] markets welcomed a robust surge in September, while the VC investment focus turned to the educational market, the Shanghai Securities News reported today.

Last month, the China's VC market witnessed this year's high of over US$360 million in a single month, while investment in PE market totaled US$ 990 million, up 110.6 percent month-on-month, according to the report from Chinaventure, one of the most popular venture investment consulting institutes in China.

Compared with August, eight more VC investment cases were reported in September, with the VC investment volume surging US$ 129 million, up 54.7 percent from August. At the same time, although only a total of six PE investment cases were reported last month, the average investment amount in each case totaled US$165 million. The PE investment still concentrated on traditional industries. For instance, China National Bluestar (Group) Corporation, a chemical industry enterprise, alone gained US$600 million in investment funding from US' Blackstone Group.

Meanwhile, the VC investment, conventionally focused on technology, media and telecom (TMT) industries, turned to education and training industry. A total of seven educational institutes, five in non-TMT industries and two in the network education market, reaped a total of US$124 VC investment in September. In general, some 10 VC investment cases reported in TMT industries, amounting US$139 million, far less than the total 19 cases, with US$226 billion in non-TMT industries.

There are both compelling fundamental and comparative cases to be made for Chinacast. Q2 revenues were $5.6 million and net income was $1.9 million (EPS $0.07); they see Q3 revenues of $5.6 - 6.0 million. Their recent acquisition (51%) of Wuhan Media and Communications College is to add $5.5 million annually to revenue and about $0.07 to EPS.

Excluding ANY growth in the core business and also excluding ANY estimates for their newly opened English language training institutes (7 opened in July in Bejing, and 20 expected nation-wide by the end of 2008), FY08 EPS would be about $0.28 on revenues of $27.5 million (about 30% growth in both over FY07 projected).

They also sport $90 million in cash and no debt.

Chinacast also compares favorably to newly IPO'd Noah Education on a number of metrics, including operating margins (Chinacast 39%, NED 12%) and earnings (FY07 EPS: Chinacast $0.26 annualized, NED $0.28).

Chinacast is a still undiscovered play on the growing Chinese education market and with an expected upcoming move from the OTC to the Nasdaq, could see further share price appreciation in the near term.

Disclosure: Author has a long position in CEUC.OB

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