Strategic trade
Trade view / 11 December 2014 at 3:29 GMT

New Oriental Education partners with Tencent for English language app

China Watcher / Shanghai
China
Instrument: EDU:xnys
Price target:
Market price:
Background

Over the past two earnings calls, the disappointment of the second quarter and optimism of the third quarter have been boosted by the news that New Oriental will partner with tech giant Tencent to produce a range of English learning apps, which would see New Oriental expand its customer base, and Tencent enter into the lucrative online education business. On December 8, both firms announced that the uDA English app had been released, which is designed for middle school and university students to improve their English.

The app features a three-pronged approach, using a question scanner, an ability-adaptive exercise function, and interactive tutoring. Students will be able to contact with New Oriental’s teachers and can create study groups through the app. The firm believes that this will be a revolutionary way for students to study using online education, and will look to using the technology for other subjects.

The app is free to download and will be promoted through both New Oriental’s and Tencent’s platforms, which will likely see millions of people download the app over the next few months. The timing of the app release is important because the company’s fiscal second quarter (Dec-Feb) tends to see increased demand for the New Oriental’s premium products, as the end of year exams are at the end of the fiscal third quarter. The release of the app will allow students to test their English level, introduce them to the firm’s products, and will encourage students to purchase premium English learning products.

New Oriental’s new English learning app
New Oriental's uDA app
 































Source: New Oriental Education

Tencent is one of China’s big three technology firms alongside Baidu and Alibaba, but it’s relatively unknown to western investors because it is listed in Hong Kong and in the US OTC markets. However, Tencent has the two biggest messaging services in China in QQ and WeChat, which have a combined user base of around one billion, owns part of Alibaba’s biggest rival JD.com, is the biggest online gaming firm in China, as well as many other accolades and investments.

New Oriental’s fiscal quarters end a month before standard firms’, meaning that December 1st marked the start of the firm’s second quarter. Therefore for a detailed view on the affect that uDA app is having on the top and bottom line, investors should have to wait for the second quarter earnings call in April. However, I would expect that management would give an update during the second quarter earnings conference call in January.

Management and risk description

New Oriental, along with rival TAL Education, tend to report earnings before other Chinese firms because their fiscal quarters end a month earlier than standard. Therefore we can expect that by the end of April, New Oriental will have released two earnings reports. The first of which will likely see management discuss the initial affect of the new app on revenues and profits, whilst the second earnings report will be the first quarter to include revenues from the app, so investors will be able see the detailed affect of the product. I have therefore given the trade a five-month horizon, in order to include both earnings calls.

New Oriental’s share price has fallen from $23.78 in October to its current price of $21.04, and a reason for this is the weak Chinese economic data over the past few months. We’ve seen this disappointing performance with most Chinese equities over the same period, and the risk is that this could continue.

Parameters

Entry: $21.04

Stop:
$19

Target: $25

Time Horizon: Five months

— Edited by Adam Courtenay

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