Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

China Education Alliance delivers strong 2Q results

2010-09-25: China Education Alliance's (CEU.NYSE) share price may be languishing, but it should rebound once the US market recovers China Education Alliance (CEU.NYSE), which provides online and on-site guidance to Chinese students preparing for examinations, scored highly in its second-quarter financial results.

First-half net profit reached US$7.92 million, up 21% year-on-year, while revenue for the same period rose 19% to US$19.5 million. Gross margins improved to 81.6% in the first half of 2010, 4.4 % increase year-on-year. This compares favorably to industry leader New Oriental Education & Tech Group (EDU.NYSE), which produced a gross margin of 61.9%.

Cash flow from existing operations came to US$10.1 million in the first half, up 20.64% year-on-year, indicating a strong recovery in Chinese spending on education and career training.

China Education Alliance’s most recent closing price was US$4.08, down 9.53% since August 14, when the company released its second-quarter results. Its price-to-equity (P/E) ratio is currently only 7.15 and the price-to-book (P/B) ratio is 1.53, pretty low for a company with an annual growth rate of above 45% in the past three years.

An analyst at brokerage Rodman & Renshaw, who asked not to be named, pointed out some possible reasons for the struggling share price.

The gloomy prospects for the US economy obviously have an impact, dampening investor enthusiasm for small- to mid-cap stocks. At the same time, China Education Alliance offers little liquidity as only a limited number of its shares – 31.65 million – are tradable.

“No doubt it negatively impacts the preferences of institutional investors because when they want to sell the shares, it could be difficult to find someone else to accept the selling,” he told SinoSage. “But it is indeed a very good company.”

(Full disclosure: Rodman & Renshaw’s investment banking division has underwritten share offerings by China Education Alliance.)

Currently, the average price-to-equity (P/E) ratio of US-listed education industry stocks is 17 while the average price-to-book (P/B) ratio is 14.3. And it’s very unlikely to see the US education industry having stronger growth prospects than its Chinese counterpart.

Diluted earnings per share (NYSEARCA:EPS) for 2009 were US$0.59 and SinoSage is confident in China Education Alliance reaching an EPS between US$0.55-US$0.59 in 2010. Now is a good time to go long on this stock.