On a recent trip to the US, I was impressed with the number of questions I had to field from investors about New Oriental Education (EDU), but not surprised: ever since 2021 the stock has caught the imagination prompting curiosity about why we sold it in May 2021 (marked in red on the chart below) ahead of Beijing’s prohibitions against after school tutoring. This time around investors were on the opposite tack: why, after the Company’s near-death experience, had we chosen to re-enter the stock?
And yet, last year it was one of our top performing stocks after we bought it again in January (see chart below).
Source: Aubrey (Bloomberg), March 2024
Prior to 2021 the Company’s business model seemed clear enough: the provision of extracurricular teaching in a competitive educational atmosphere appeared to be a good investment opportunity. Prioritising a child’s education is, after all, a global phenomenon. China is no different, and with a school age population close to 250m and with 10m students graduating from high school every year, the competition for getting a place at a decent university is fierce. The one child policy means that it is not just the resources of the parents that are brought to bear but also those of two sets of grandparents.
What could have been simpler you might ask? And you would have been justified in saying as much until of course Beijing waded in. Like all markets that promise attractive returns there are unintended consequences: capital flooded in, and new entrants started poaching teaching staff from the increasingly hard-pressed state schools. With Dada Xi’s desire to protect the flower of Chinese youth from undesirable hothousing swingeing restrictions were introduced which effectively undermined the model. By the end of 2021 the stock price fell 90% from its all-time high, in January 2021, where it languished for much of 1H22.
So why did we buy back in January 2023 (marked in green on the chart above)?
EDU is a great example of the tenacity and dynamism of the Chinese entrepreneurial spirit. Faced with extinction, the management changed the business model. Instead of focusing on academic tutoring of school age children, EDU brought its acumen to bear on non-academic tutoring in subjects ranging from chess to coding using the well-established system of learning centres that led to their success prior to regulation. Non-academic tutoring is a nascent sector, but the Company management believe it could grow to 80-100bn USD. In addition, expansion into other areas such as cultural tourism are being considered.
Management have continued in the positive mode exhibited last year, when the stock rose almost 80%, and EDU has had a strong start in 2024.
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