Article / 21 October 2015 at 4:41 GMT

New Oriental earnings on song, but competitors loom

China Watcher / Shanghai
  • Student enrollment has grown, but is the firm losing its prestige value?
  • Pricing power has eroded indicative of growing competition in the market
  • Rival TAL Education has been actively investing in quality content providers

By Neil Flynn

Chinese private education firm New Oriental Education kicked off earnings season for US-listed Chinese firms yesterday by beating both revenues and earnings. This should come as quite a surprise given that the firm has failed to beat its fiscal first quarter (calendar third quarter) revenue guidance for the past three years.

Student enrollment grew in the most important quarter of the year, but there are signs that the firm is losing its prestige value as the average revenue per student continues its structural decline. Below are the three key takeaways from the earnings release.

Headline results

New Oriental announced that its fiscal first quarter revenue of $458.49m beat the market consensus of $447.6m and the non-GAAP EPS of $0.84 beat the $0.74 expectation. All in all, this was a good quarter for the firm, and this was reflected in the 8.7% rally in the share price on Tuesday to $24.98.

Private education in China is highly seasonal, making quarterly comparison all but meaningless, but revenue growth on an annual basis is showing a positive trend. Since the low of 1.4% annual growth in the fiscal first quarter of 2015, year-on-year revenue growth has increased every quarter, with the latest figure being 16.4%.  

EDU Revenues
Source: New Oriental Education

The earnings beat was the third quarter in a row, which indicates that the firm is recovering from its disappointing performance last year. The firm was late in rolling out its new platforms for the start of the fiscal year (start of the school year), and there were uncertainties about planned changes to the university entrance exam, meaning that students weren’t willing to commit to a year’s worth of tuition fees until clarity was given. Fortunately for investors, the firm appears to have recovered from this issue.
EDU Earnings
Source: New Oriental Education

Strong year-on-year operating metrics

Student enrollment growth remained strong for New Oriental, with total student enrollments growing 13.8% to 1,011,300 for the first quarter. Given the seasonality in the industry, the fiscal first quarter always sees the largest student enrollments, making quarterly comparisons meaningless.

I was slightly concerned prior to the release because the fiscal fourth quarter saw an unusually high number of enrollments, and therefore I was interested to see whether this was a transfer from previous quarters or from future quarters, given that the fiscal fourth quarter is typically one of the worst for enrollments.

Enrolments are up for New Oriental, but so too is the competition. Photo: iStock

Year-on-year enrollment growth of 13.8% is above the long-term average, and barring last quarter’s result, it is the highest that the company has ever posted.   

EDU enrolments
Source: New Oriental Education

Declining pricing power is a concern

New Oriental has always classed itself as a prestige brand in the private education business in China, meaning that it is able to charge higher prices that its competitors, both local and national. Whilst this may be true, its pricing power has been eroding over the past few years, and I believe that this is indicative of growing competition in the market, and a general improvement in content quality across the industry.

EDU Pricing Power
Source: New Oriental Education

Based on the measure of total revenues per enrolled student, the year-on-year trend is steadily downwards, although remains positive. The fiscal third and fourth quarter were particularly volatile in this regard, and perhaps next quarter earnings release should be waited for in order to get a truer picture. However, year-on-year ARPU growth of just 2.2% is not indicative of a company with strong pricing power.

Final thoughts

This was a good earnings release from New Oriental, and a good start for the earnings season of US-listed Chinese firms.The pricing power issue seems concerning for New Oriental, but in reality in was inevitable. Rival TAL Education has been actively investing in quality content providers, so the likelihood of New Oriental being able to charge extra just because of its name was very low and certainly unsustainable over a longer period of time.

TAL Education will report its earnings on Thursday before the opening of the markets. This should be a good indication of how New Oriental’s results look in relation to the market as a whole.

-- Edited by Adam Courtenay

Neil Flynn is a China watcher based in Shanghai.


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