Stocks in China $MCHI are not doing well and one sector not doing well at all is the private education sector. New Oriental Education & Technology $EDU is the largest private education company in China.
EDU seems to be a deep value stock, selling below its cash value. But is it? Is it really such a good investment?
In recent months, China has gone after its technology companies such as Tencent and Alibaba $BABA but they are also going after the private education companies. And that's in order to make sure that what is being taught is in compliance with the Chinese Communist Party.
There have been more and more regulations on private education in China causing the margins of EDU to go down in recent years but now they have decided that afterschool tutoring should be non-profit. According to EDU, they could lose 60% of their revenues. The stock price, however, crashed by over 90%. Has the market overreacted?
The Free Cash Flow of the company seems quite big but we need to understand how the business operates to know why this is the case. Students pay upfronts. All this FCF is deferred revenues, which are liabilities. Much of these payments have to be reimbursed. Therefore, the FCF will go down and so will the current cash balance.
Without a clear plan on how they will navigate the new regulations, this company doesn't look like a good investment at such prices to me.