Morphic Asset Management: New Oriental Education & Technology Group

Established in 1993, New Oriental Education & Technology Group (EDU) is the largest provider of private educational services in China.  The company offers a wide range of educational programs. It has had over 55 million student enrolments, operates 104 schools, has 1465 learning centres and 12 bookstores and employs over 41,400 teachers in 91 cities.

EDU is a long-term market share gainer in a growing market that near-term will benefit from the ‘reopening trade’ as their learning centres resume operations. The Covid-19 epidemic accelerated their investment in an O2O (online/offline) learning model which we see as the ‘right’ learning model and key product differentiator to propel them ahead of competition.

EDU is a market consolidator beneficiary in a growing market with the best-known brand and the widest network footprint. The education market was undergoing market consolidation as a result of tighter regulations however Covid-19 has accelerated this trend as tough conditions have caused smaller players to exit.

The Chinese after school tutoring (AST) demand is expected to grow between 10-12% CAGR in 10 years to 2030 reaching a market size of almost rmb3 trillion, 3x the 2019 size. This is driven by China’s annual disposable income per capita that grew from rmb17K in 2009 to rmb42K during the 10 year period of 2009 to 2019, representing a 9.4% CAGR.

EDU will benefit from a rising middle class given that they have the widest learning centre network across different tier cities allowing them to capture the faster rate of growth of lower tier cities where teaching staff are less resourced. EDU are guiding to 20-25% capacity expansion per annum that will be a key driver top line growth. Rising utilisation rates and average selling prices will drive margin expansion and a strong upward trend in earnings per share.

Regulatory changes could negatively impact the economics of the industry. Competition from fast growing online players could erode industry profitability and cannibalise offline learning.  Geopolitical risks associated with US ADR listings.

This information has been prepared and provided by Morphic Asset Management. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.