China has long placed a cultural premium on education, and it is not unheard of for Chinese parents to spend small fortunes to ensure their children have every possible advantage at school, including tutoring to boost their progress in class and provide the best exam preparation .
Given this cultural emphasis on education, it’s not surprising that Morgan Stanley analyst Eddy Wang chose to focus on Chinese education stocks, particularly those that specialize in high school education.
“Strength in new business units and resilience in traditional units should help foster sustainable growth for education market leaders. Bolstered by strong net cash positions, China’s education industry should provide a defensive defense in a turbulent ADR market,” Wang opined.
The analyst continues to pioneer coverage on Chinese education leaders who deserve a closer look. We ran them through the TipRanks database to see what makes them stand out.
Don’t miss out
New Oriental(EDU)
First is New Oriental, a key player in China’s for-profit education and learning companies. New Oriental was founded in 1993 and today offers clients and students a wide range of programs to choose from, including language training, test preparation courses for foreign and domestic exams, and online education. Support products include educational content and software systems.
The company offers courses and educational materials both online and in person. Earlier this year, it boasted a network of 793 learning centers – including 83 schools – along with 9 bookstores. The company has a nationwide network of such bookstores, online and offline, and its network includes 241 third-party distributors and more than 30,300 teachers in 76 cities across China.
The first thing an investor will notice when looking at New Eastern this year is the stock’s performance. Shares in EDU are seriously outperforming – the shares are up more than 95% of the year. The stock gains came hand-in-hand with solid improvements in revenue; the company reported three consecutive quarters of consecutive revenue growth.
In the last reported quarter, fiscal 1Q24, New Oriental reported $1.1 billion on the top line, a result that was up 47.7% year over year and more than $90 million ahead of forecasts. The company’s bottom line figure, non-GAAP net income per ADR, came in at $1.13, beating the forecast by 33 cents. New Eastern reported $335.8 million in operating cash flow for its fiscal Q1, versus quarterly capital spending of $132.5 million.
For Morgan Stanley’s Eddy Wang, the outlook for the stock is strong, based on its solid fundamentals. Wang says of EDU, “Demand for high school tuition has been resilient as competition in China’s university entrance exams is still quite intense. We model EDU’s revenue from high school tuition to grow 23% YoY in F2024, accounting for 26% of total revenue. For overseas test preparation/consulting, which has been adversely affected by the Covid lockdown and US-China tension, we expect demand to gradually recover from F2024 (see the Overseas Test Preparation and Consulting (Traditional Business) section). We model the overseas EDU business to grow by 28% YoY in F2024, accounting for 24% of total revenue.”
Looking ahead, Wang believes there is still room for growth here, and he outlines the stock’s potential: “EDU’s share price has significantly outperformed YTD (+90%), however we still believe EDU deserves an overweight rating, due its greater scale post-Double Reduction allows it to enjoy market gains and better margins, with high visibility on near-term revenues and earnings over the next 1-2 years.”
Wang’s overweight (ie Buy) rating on EDU is complemented by his price target of $81, which suggests a 19% potential for the next 12 months. (To view Wang’s story, click here)
Do other analysts agree? They are. According to TipRanks, 5 Buys and no Holds or Sells have been issued in the last three months. So, the message is clear: EDU is a Strong Buy. The stock is trading for $67.87 per share on Wall Street, and the average price target of $80.78 implies a one-year gain of 19%. (See EUD stock forecast)
TAL Education Group(TAL)
The second stock we will look at is TAL, another of China’s private for-profit education companies. TAL offers best learning opportunities using a combination of high quality teaching and learning content. The company’s services are available for students of all ages, from preschool to grade 12, and are offered through three flexible class formats: online courses, small in-person classes, and personalized high-quality tutoring services. The company’s services cover enrichment programs and selected academic subjects, mostly in the Chinese education system.
TAL’s mission is to provide the highest level of educational and educational support services available, based on quality, talent and technology. The company promotes a customer-oriented approach based on innovation and collaboration.
In its October financial release, for fiscal 2Q24, TAL reported its best revenue result in the past 18 months, with a quarterly top line of $411.9 million. This grew by 40% year over year and came in $14 million better than forecast. TAL’s bottom line came in at 10 cents per ADS by non-GAAP measures, beating estimates by 2 cents.
On balance, the company had cash and liquid assets of $2.96 billion as of August 31 this year, down 6.6% in the past six months.
The company caught Eddy Wang’s attention because of its solid high school business. Wang writes of TAL, “We model TAL’s high school tuition business to grow 6% YoY in F2024, driven by a steady increase in enrollments. We also model TAL’s high school tuition revenue to account for 20% of total revenue in F2024 (versus 25% in F2023), with increasing revenue contribution from other new businesses.”
“We forecast TAL’s revenue from enrichment learning services to grow 30%+ YoY in F2024, with a double-digit operating margin; this could help drive the company’s overall earnings growth,” Wang added.
To this end, the Morgan Stanley analyst rates TAL shares Overweight (ie Buy), and his price target, $10.50, implies that the shares will increase in value by 12% in the next year.
Overall, this Chinese education stock has a Strong Buy consensus rating from the Street’s stock watchers, based on 3 positive reviews set in recent weeks. The stock has an average price of $11.17, suggesting a ~19% one-year upside from the $9.40 current trading price. (See TAL stock forecast)