Deloitte estimates the U.S. and global labor shortage is reaching a critical point and is restricting what could be much higher growth for Integrated Circuit manufacturers and tech companies. For the first time, there are now more job openings than there are eligible workers to fill them. The key word here is “eligible”, meaning skilled. Private payrolls are growing less than expected owing to a shortage of skilled labor to fill the demand for high tech jobs in integrated circuit manufacturing and tech companies where strong economic growth has been expected to continue, but is disappointing. Deloitte estimates that the U.S. alone could suffer $2.5 trillion in lost business over the next ten years if skilled labor supply continues to fall short.
Ambow Education Group(NYSE: AMBO) is a leading national provider of educational and career enhancement services in China and is now entering the U.S. market. Ambow’s business addresses two critical demands in China’s education market; the desire for students to be admitted into top secondary and post-secondary schools, and the desire for graduates of those schools to obtain more attractive jobs.Founded in Silicon Valley andrelocated to China in 2000, Ambow built its core technology innovation system and currently holds a competitive advantage in technology innovation among China’s education services industry. WWW.AMBOW.NET
Ambow was awarded a patent from the United States Patent and Trademark Office for its innovative Adaptive Computer-Assisted Learning System and Method platform for enhancing learning outcomes, which makes it the first China-based education company to receive a U.S. patent in the adaptive learning methods field.
With its extensive network of regional service hubs complemented by a dynamic, proprietary learning platform, Ambow now services students in 30 of the 31 provinces and autonomous regions within China. In 2017, Ambow acquired Bay State College in Boston, Massachusetts to serve as a model for Ambow’s unique Cross-Border College program that offers Chinese students both a China diploma and a U.S. baccalaureate degree. The Cross-Border College program is expected to provide strong growth because it offers substantial new and needed revenue to many U.S. colleges, it appeals to millions of aspiring Chinese citizens, and it plans to provide large numbers of valuable skilled workers for integrated circuit makers and tech companies.
By creating tech-focused curricula aligned with dynamic industry demand and coupled with the Company's enormous educational resources and expertise; Ambow has assumed a major role in helping Chinese career colleges and schools address five key industry challenges: curriculum development, qualified faculty, practical training, job placement and international cooperation. As an example, Ambow recently established the first college big data laboratory in China for one of their college partners to educate students in all aspects of advanced fields, thus preparing them for highly-skilled jobs in emerging and fast-growing IT industries.
Another exciting development in 2018 was the initiation of field testing for Ambow’s holographic virtual learning environment. The technology was implemented with some of our college partners who, in turn, were inspired by Ambow's innovative approach and have asked to set up additional programs. Ambow management is confident that more colleges and institutions will be engaging with Ambow to help improve their competitiveness and presence in industry.
With a market cap of only $135 million and a share price of $6.35, Ambow shares are significantly undervalued and offer substantial unrealized value coupled with solid growth prospects for 2019 and beyond. Ambow has strong financials, is undergoing a major expansion in China, breaking into the U.S. market with a model that is attractive to U.S. Universities and students, and is expected to generate over $100 million in sales in 2019. Ambow’s strong educational programs targeting high-tech jobs are particularly attractive now that there is a growing awareness of the critical shortage of skilled workers for technical jobs.
Although Ambow has no plans to sell them, their K-12 schools are now valued at $300 million which is in excess of the current market cap for the entire company. With their unique education model that is demonstrating impressive sales gains, and with their new models for expansion, combined with a large number of corporate and college partnerships expected to provide large numbers of highly skilled workers in high demand, the market is likely to soon discover Ambow and revalue shares at well over $500 million, or closer to $22 per share based only on current metrics and comps.
Ambow Entering U.S. with First Acquisition of Bay State College
Ambow highlighted their progress in a recent Letter to Shareholders.“Following the acquisition of Boston-based Bay State College in November 2017, Ambow started to implement significant operational improvements, which continued throughout 2018, as part of our near- and long-term strategic goals, including the restructuring of Bay State's management team, and optimizing the college's operations, financial efficiency and student enrollment.”
“Starting with Bay State College, we moved quickly to initiate the launch of the first Cross-Border College Program (between China and U.S. colleges) in the fourth quarter of 2018. This program is designed to fulfill demand from Chinese students wanting to earn a bachelor's degree in a popular major, serving as the basic foundation to the start of a career in China or in the United States. The program will allow thousands of Chinese students who now receive three-year diplomas from Chinese colleges - the equivalent of an associate degree from a U.S. college - to continue their education with a two-year advanced education program and earn a bachelor's degree from Bay State College or another U.S. college.”
“The Cross-Border Program has been very well-received among our Chinese college partners, and certain cooperation agreements and integration plans have already been implemented. This program further validates our mission to provide "Better Schools, Better Jobs, Better Lives" to our students by leveraging Ambow's established expertise, vast resources and diversified channels in the education space. Ambow's unique industry-leading position continues to benefit our core business while we explore additional growth opportunities, including the entry into new verticals.”
“As a recognized and highly respected educational services provider, we are excited about the year ahead and our ability to expand Ambow's brand and market position in both the United States and China through continued delivery of our powerful learning platform, the initiatives of entry into new verticals, and a deepening of cross-border relationships with other educational providers.”
Ambow is highly undervalued:
Considering Ambow’s current sales, Ambow’s Price to Sales ratio of 1.9 is well below the industry average of 6.85. Based on Ambow’s current run rate of $70 million per year, the average Price to Sales ratio of 6.85, commands closer to $22 per share from its current price of $6.16 per share. And this valuation does not factor in the projected sales of $100 million for 2019.
Ambow’s unique education model is growing rapidly with the potential to generate very large revenues as they continue to grow in China. With the addition of their strategy to enter the U.S. market, and to provide large numbers of skilled workers, sales growth can become quite impressive.
One of many big unmet education needs is shortage in Integrated Circuit sector
According to a Whitepaper, China’s integrated circuit sector is facing the potential of a severe talent shortage as the talent pool in the industry at the end of 2017 was about 400,000, while China is expected to need approximately 720,000 IC-related workers by the year 2020. Considering the rapid growth of the sector, vocational training and overseas recruitment are playing more important roles in filling the expanding requirement to provide 100,000 integrated circuit workers, on average, per year to capture this ever-growing demand.
The findings of this latest Whitepaper make it clear that traditional colleges and universities will be challenged to meet the demand for IC professionals for years to come. Through Ambow’s continuing development of courses and programs, the company is working hard to reduce this anticipated shortage by preparing students to meet the requirements of IC enterprises. Ambow’s reach is strengthened greatly by partnerships with more than 200 colleges and 4,000 corporations throughout China,” commented Dr. Jin Huang, Ambow’s President and Chief Executive Officer.
Dr. Huang added, “The IC sector plays a significant role in China’s technology-driven economy, and further technological development is strongly supported by the government. We are honored to continue our contribution to the preparation and release of this highly anticipated Whitepaper, and we are pleased to do our part to prepare and train professionals for the integrated circuit industry.”
Strong financial results were reported during the first nine months of 2018. Net revenues and gross profit reached US$52.8 million and US$19.8 million, respectively, representing growths of 17.3% and 7.0%, compared to the same period in 2017. Operating expenses as a percentage of net revenues decreased by 10.0% throughout the first nine months of 2018, compared to the first nine months of 2017. As of September 30, 2018, Ambow had cash resources of US$62.1 million. With a strengthened capital and operating structure, the company is working diligently toward balancing growth, profitability and cost-saving measures. A full accountingcan be seen on SEC Edgar site. Another significant financial metric is that Ambow delivered an ROE of 27.7% over the past 12 months, which is an impressive feat relative to its industry average of 12.5% during the same period.
Following are current market comparisons of Ambow to competitive companies in the same space:
Ambow Education Group (NYSE: AMBO)
Market Cap $135 million
Price to Sales 1.9
New Oriental Education & Technology Group (NYSE: EDU)provides private educational services under the New Oriental brand in the People's Republic of China. It operates through Language Training and Test Preparation Courses, and Others segments. The company offers test preparation courses to students taking language and entrance exams used by educational institutions in the United States, the People's Republic of China, and the Commonwealth countries; and after-school tutoring courses for middle and high school students to achieve better scores on entrance exams for admission into high schools or higher education institutions, as well as for children to teach English. It also provides language training courses, including English, as well as other foreign languages, such as German, Japanese, French, Korean, Italian, and Spanish; operates a full-time private primary and secondary school in Yangzhou seeking a full curriculum taught in Chinese and English; develops and edits educational materials for language training and test preparation comprising books, software, CD-ROMs, magazines, and other periodicals; and offers online education programs that include college, K-12, and pre-school education. In addition, the company offers overseas studies consulting; pre-school education; and a pilot program that permits third parties in small cities to provide its English and kindergarten programs, as well as overseas study tour services. As of May 31, 2018, it offered educational programs, services, and products to students through a network of 87 schools, 994 learning centers, and 18 bookstores. The company was founded in 1993 and is headquartered in Beijing, the People's Republic of China.Sales growth has been consistent.
Share price $78.58
Market Cap $12.47 billion
PE 54 to 1
Price to Sales 4.5 to 1
TAL Education Group (NYSE: TAL)through its subsidiaries, provides K-12 after-school tutoring services in the People's Republic of China. It offers tutoring services to K-12 students covering various academic subjects, including mathematics, physics, chemistry, biology, history, geography, political science, English, and Chinese. The company also provides tutoring services primarily through small classes under the Xueersi, Mobby, and Firstleap brand names; personalized premium services under Izhikang name; and online courses. In addition, it operates jzb.com, an online education platform that serves as a gateway for online courses offered through xueersi.com; and other Websites for specific topics and offerings, such as college entrance examinations, high school entrance examinations, graduate school entrance examinations, preschool education, and raising infants and toddlers, as well as mathematics, English, and Chinese composition. Further, the company provides educational content through mobile applications; operates mmbang.com and the Mama Bang app, an online platform focusing on children, baby, and maternity market; and provides consulting services for overseas studies under the Shunshun Liuxue name. Additionally, it offers tutoring services for students aged two through twelve under the Mobby brand; provides education and management consulting, and investment management and consulting services; and develops and sells software and networks, as well as offers related consulting services. The company also provides online advertising services; and engages in the sale of educational materials. As of February 28, 2018, the company's educational network included 594 learning centers and 465 service centers in 42 cities. TAL Education Group was founded in 2003 and is headquartered in Beijing, the People's Republic of China. Sales growth has been impressive.
Market Cap $18 billion
PE 55 to 1
Price to Sales 7.69 to 1
Chegg, Inc. (NYSE: CHGG) operates direct-to-student learning platform that supports students on their journey from high school to college and into their career with tools designed to help them pass their test, pass their class, and save money on required materials. The company offers Chegg Services, which include digital products and services; and required materials that comprise its print textbooks and eTextbooks. Its digital products and services include Chegg Study, which helps students master challenging concepts on their own; Chegg Writing that enables automatically generate sources in the required formats, when students need to cite their sources in written work; Chegg Tutors that allow students find human help on its learning platform through a network of live tutors; Chegg Math, an adaptive math technology and developer of the math application; Brand Partnership, which offers various ways for student-relevant brands to reach and engage high school and college students; Test Prep that provides students with an online adaptive test preparation services; and internships services. The company rents and sells print textbooks and eTextbooks; and offers supplemental materials and textbook buyback services. The company has a strategic alliance with Ingram Content Group. Chegg, Inc. was founded in 2003 and is headquartered in Santa Clara, California. Sales growth has been relatively disappointing although there is still a huge market opportunity for Chegg to pursue.
Market Cap $4.1 billion
Price to Sales 13.71 to 1
Bright Horizons Family Solution
Market Cap $6.78 billion
PE 43 to 1
Price to Sales 3.64 to 1
Grand Canyon Education, Inc.
Market Cap $4.45 billion
PE 20 to 1
Price to Sales 4.73 to 1
Ambow shares many commonly encountered risk factors such as the inability to raise capital, unexpected lawsuits, unfavorable international political or economic events, and most likely the typical lengthy CYA laundry list expected from any prudent company, but appears to have managed risks well with strong financials and growth.
Based on multiple current industry standard market comps, Ambow Education shares are substantially undervalued, but even more compelling is that Ambow growth is strongly positioned for further dramatic gains as the company continues increasing growth in China and is now entering the large U.S. education market with an emphasis on providing skilled labor for the integrated circuit and tech sectors. Ambow has good access to capital since they were ushered into the U.S. financial markets through an IPO funded by Goldman Sachs, JP Morgan and others. Higher Ambow share prices are forecast as Ambow shares offer exceptionally low undervalued prices combined with strong growth and currently meets requirements and qualifies for purchase by many institutional investors. Small retail investors and small institutions currently have an opportunity to accumulate Ambow shares at undervalued prices before larger institutional buyers discover and drive up price.
AMBO is rated “Strong Buy” with 12-month target of $22.00