The past four years have been difficult for many Chinese companies listed on U.S. stock exchanges as the Chinese government has put pressure on its private sector.
For example, e-commerce giant Alibaba (SLIME) has lost nearly three-quarters of its market value (73%) since October 2020. But Alibaba and other Chinese stocks have bottomed this year (and some last year).
Rayliant Global Advisors
Within sectors, education is one of the most important in China as the country seeks to compete economically with the West. And New Oriental Education & technology Group (Education) It is a major player in this field.
Until the government clamped down on tutoring in 2021, after-school tutoring accounted for 50% to 60% of New Oriental's revenue.
Morningstar's New Oriental Rating
“After winding down its K-9 after-school academic tutoring business, New Oriental has identified some new initiatives, such as non-academic tutoring and smart learning systems and devices,” according to research firm Morningstar.
“The remaining businesses include after-school academic tutoring for high school students and overseas exam preparation and consulting services. The company also owns 55% of East Buy, the market leader in livestreaming e-commerce.”
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The new initiatives look promising, given New Oriental's experience in after-school tutoring and curriculum development, wrote Morningstar analyst Cheng Wang,
New business accounted for only about 17% of revenue in fiscal 2023, “but growth is robust and we project a 27% revenue contribution for fiscal 2028.”
Jason Hsu's vision of New Oriental
Jason Hsu also likes New Oriental. He is the chief investment officer at fund management firm Rayliant Global Advisors. His strategies are used for $17 billion in assets and the firm manages four ETFs, mostly focused on foreign stocks.
Hsu has been in the money management business for over 25 years. He founded Rayliant and co-founded the highly regarded money management firm Research Affiliates.
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He is an avid model builder, and not just financial models, but also warplanes, “Star Wars” and “Star Trek” spaceships and “Transformers” robots.
Hsu recently spoke about his favorite stock picks with TheStreet.com. It's part of our “Best Trade” interview series.
What is your best business idea?
New Oriental specializes in helping students prepare for the exams required by Chinese students who wish to enter American and Western universities. This includes the SAT, GRE, GMAT, TOEFL, and AP exams.
These educational programs do not conflict with Beijing's regulation that prohibits for-profit high schools from offering tutoring services for grades K-9.
What do you like about New Oriental?
The substantial increase in Chinese students applying to study abroad indicates record revenue growth for New Oriental.
The company’s stock price plummeted by almost 90% when Beijing first banned for-profit education companies from offering private tutoring. This price reaction was irrational, as New Oriental’s revenues largely came from unregulated tutoring services.
In fact, after the restriction went into effect, the company's revenue fell by less than 30%, compared with reductions of more than 80% for competitors.
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So the New Oriental sell-off became a tremendous buying opportunity for contrarian investors. (On August 19, it was trading at $70, down 32% over the past five years but up 40% over the past 12 months.)
Beijing has partially backed off its restrictions on private lessons, but many of New Oriental’s competitors have been left behind. Its revenue has hit record highs, but its shares are only 35% off their peak.
What could go wrong with New Oriental stock?
The stock's rally over the past year could create significant selling pressure, even if the valuation remains extremely attractive.
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