New Oriental earnings on song, but competitors loom
- 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
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.
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%.
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.
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.
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.
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.
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.