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Is English First Co. a Threat to New Oriental?

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I noticed this “English First Co.”, which is 2008 Beijing Olympics language training partner, because of their ubiquious ads (outside and inside) Cloud 9 building. I understand there are at least 2 levels of Olympics partners. Lenovo, Haier and Coke Cola, etc are exclusive sponsors (in its product category). In other words, they gave more money to Olympics committe and they got more exposure in return. MengNiu (diary product), “English First” and others are product providers. As the name implies, they gave products to Beijing Olympics. But still, I was puzzled why New Oriental did not go for it? I can think of two reasons: 

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Xinhua Finance Media IPO Fiasco

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Xinhua Finance Media Limited (XFML) did not turn out to be another Home Inns or New Oriental, at its IPO debut last Friday. Besides the difference of market sentiment then and now, I think the fundamental reason lies within the company and the business itself.

First Xinhua Finance is in the media and advertising business. Note media industry is still heavily regulated in China, this is different from Home Inns’ economy hotel business, which is pretty much a free market (as long as they can secure the building).

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Home Inns Mindray New Oriental

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These days you need some faith to hold those relatively new Chinese IPOs. I only have Mindray (MR) at this time, but I have traded HMIN and EDU before. All three stocks dropped a lot from it highs in a week. I just want to summerize my observation after spending 2 days in Shanghai, this is in no ways a comprehensive study.

Home Inns: it faces more competition. I went to Jinjiang Inn on Sunday with a friend, we need to book a room for another friend. It’s fairly easy. Maybe this is not a busy season. But I remember one or two years ago it’s not easy to book a room one day in advance. Also Marriot (the American hotel giant) bought a Chinese economy hotel chain “Xingyu Star” and renamed it as “Wan Jia Wan Hao”. It plans to open 300 hotels in a few years.

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How Did I Find Growth Stocks

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New Oriental (EDU, based in Beijing): every Chinese student came to US for study knows that, no need to say anymore. 

Home Inns (Rujia, HMIN, based in Shanghai): my friend in my hometown told me about this in summer 2004. He is a small business owner and he thinks that Rujia is clean and economical. He would stay there when he visits Shanghai as long as he does not see his foreign clients. I believe business travallers make up more than 50% of Rujia’s business.

Mindray (MR, based in Shenzhen): found out shortly after its IPO. I always liked medical device makers, both from investment and health/science point of view. The barrier of entry is high: unlike English (or IT) training, you put ad on newspaper, hire some English teacher and find students and a classroom, you are good to go. For medical device, you will need R&D talents (hint: graduates from HUST), good sales and customer support, all of which you can not get overnight. The risk: lawsuits, regulatory procedures.

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It’s OK to Leave Some Money On the Table

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I am not talking about the tips in the restaurants; I am talking about the stocks going up after we sell them, doesn’t that happen all the time? Just like it goes down after we bought it? My most recent example is New Oriental (EDU, it seems to me the traders did not take too much time off for the Lunar New Year). And it happened to my friends in China too. The friend was very upset when he told me the story. It seems to us sometimes “not making all the money” feels worse than “losing money”. For instance, if a stock falls after we bought it and we sold it because it never went back the level is was, i.e., we were “under water” the whole time, we may not feel that bad. But on the other hand, if it went up big and we missed the potential big profit, we will feel mad at us 🙂

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New Oriental EDU Seconday Offering

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The following is from Reuters. I have not seen the final prospectus from SEC web site yet. 

“HONG KONG, Feb 9 (Reuters) – Investors and New Oriental Education & Technology Group Inc. (EDU.N: QuoteProfile , Research), China’s largest education group, and its investors have raised US$334 million after pricing 8.05 million American Depositary Shares at a 1.78 percent discount to its last closing price.

Investors including Tiger Global and the founder of New Oriental sold the shares at US$41.5 apiece.

The shares sold comprised 92 percent of existing shares and 8 percent of new shares, the source said.”

(Update 09Feb07) The prospectus is here. If you look carefully at the “selling shareholders” section, you will find “Tigerstep Developments Limited, a company incorporated in British Virgin Islands, is wholly owned by Bamei Li, mother of Michael Minhong Yu”. Yu’s mom is probablly the richest grandma in China 🙂 

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Home Inns HMIN Yahoo Message Board

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Yes. It’s up and running now. Here is the link. I don’t know exactly how new IPOs got the message board started. It usually takse many requests, and lots of patience.

Oh, don’t take the discussions (especially the price target) too seriously. Because if you believe it and trade accordingly, you may regret later. That being said, I did see some intelligent analyses on the message boards from time to time. But a lot more emotional rants too. You are warned.

No message board for New Oriental (EDU) yet. The funny thing is that Mindray (MR) board was inherited from Morgan Food (used to have ticker symbol MR), and the board works 50% of the time. No wonder Yahoo stock did not do well lately 🙂

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What to Read from Insider Selling?

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Not too much. From time to time, the insiders of the company, a.k.a, the founders, the senior management, or even the venture capital, decided to sell their stocks in the public market. As ordinary investors I used to be worried about those kinds of events. Until I read Peter Lynch’s book One Up On Wall Street lately. Now I think we don’t need to read too much from this. Insiders are also human beings, they may want to buy a nice house, send their kids to Harvard, etc. In other words, they need to have some cash. From investment point of view, they don’t want to have 100% of their investment in their own company’s stocks too (Buffett is an exception because he is the Guru of investing/money management).

Last Friday New Oriental revealed that its CEO Yu Minghong and another director will sell a large amount of stocks. It’s no surprise the market reacted negatively. But I am not worried. I bought some more EDU stocks instead. At 33.00 (note its fiscal 2007 first 6 months earning $0.68, and its first quarter is the strongest traditionally), I believe it’s fair priced.

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Bought Some EDU New Oriental

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I don’t know why the stock went down this morning after a good earning report. Anyway guessing stock price’s daily fluctuation is not my job. I did listen to the conference call (script by seekingalpha) and it seems to me Michael and Louis did well, although Michael’s English is not perfect. Some of the growth driver:

1) Elite English, I believe this is more like “business English”, I know in Shanghai there are “WallStreet English”, “Webber English”, etc. Don’t know how New Oriental will do in this new space. But profit margin in this area is better because those customers are not price sensitive.

2) Oversea English Test preparation: I believe things have not slow down because nowadays more and more Chinese high school graduates go overseas for undergraduate education.

They also talked a bit on goverment regulation on “private education sector” and coming lock up expired period.

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Michael Yu Minghong’s New Report Card

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All right, New Oriental announced the fiscal 2007 Q2 report today. Here is the report. It seems they are doing well. Some highlights include 33% YoY reveneue growth (beat est. 20%). “The growth was mainly driven by the increase in the number of student enrollments in language training and test preparation courses.” 

I imagine people just can not get enough English classes (spoken English, business English, kids English), and all kind of testings (IT, law, graduate school admission, in addition to traditional TOEFL/GRE/ACT/SAT).