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New Oriental Education EDU ?

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I received an email from a friend asking me whether New Oriental Eudcation (EDU) will be a good investment or not. I was not warm to it initially, changed my mind and bought it in Jan., sold it in Feb., because I did not know how to evaluate it.  

First I want to say EDU is in a very sweet spot in Chinese private education market: English and test preparation. A little background, English is a very important skill in finding good jobs in China these days: from multinational companies to domestic companies, from private sector to goverment, and non-for-profit, all because the increasing interactions between China and the west in last 20 years.

Test preparation is also good. In the early days New Oriental specialized in TOEFL and GRE training. Now it’s expanding to SAT, ACT, the US college entrance test; and China Graduate Entrance Exam, which has been popular recently because it’s hard for college graduate to find good jobs in China nowadays.

So in other words, New Oriental is in the “bring hope” business for many young students and professionals in China, with its English and test preparation training. That’s the upside. What’s the downside then?

Those are things I did not like initially:

1) The company ownership and complicated organization. Michael Yu Minghong owns about 30% of the company, people who read his GRE book (like me) knows him, but he was unknown to Wallstreet. How is his management skill? Also, a control shareholder being the CEO has its downside: I was burned by NINE (Ninetowns), in which its CEO and his wife has 70% stake, the stock has down almost 2/3 since its IPO. The reason: the founder (CEO) sometimes does not think from small shareholder’s (you and me) interest. 

2) Competition: from my limited research, it seems the market EDU is trying to expand is very competitive. For instance, I heard there are many “kids English” program in the market, even in 2nd tier like Nan’chang. Also, I saw many English training providers in Shanghai last March/April. The barrier of entry is not high.

Back to the market, my concern seems a bit overworried, at least from EDU’s three quarters’ reports. Michael is being accepted by the Wallstreet as time goes; the competition is there, but EDU is incredibally focused. Unlike “English First”, it did not spend money on “2008 Olympics Sponsorship”, and giving out “fliers” on the street. It’s still using its founders’ (Yu Minghong, Xu Xiaoping etc.) chrisma for marketing purpose (low cost). It also has some new initiative such as partnership with foreign publishing house, and web learning.

I still don’t have plan to buy EDU stocks, but I do think it’s a stock worth to take a look.   

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