New Oriental Education & Technology Group EDU Stock Analysis
Catalysts:
Fragmented market in China with 20% of children attending private schools (190 000 private schools in total), as the market leader, can gain more market share (if regulators allow it)
Risks:
Chinese government enacted a new law banning for-profit after school tutoring for K-12 in July 2021
Several new regulations in recent years, lowering the margins of the company
Company expects that new regulations will cause a drop of 50-60% in revenues
Delisting of Chinese stocks in the US (stock also traded in Hong Kong)
Currency volatilities and volatility of Chinese markets
Financial Analysis:
Valuations:
My personal Biases:
Think stock could make short-term recovery based on the news but that would be only speculating and not investing
Doesn’t see management coming up with a good enough solution to the upcoming headwinds
Assumptions:
Use the 60% fall in revenues that they are projecting for 2023-2026
50% fall in revenues for 2022 (counting the few months where they had normal operations)
Use the same average profit margin of 12%
FCF margin on average was 10 pb above profit margin but much of this FCF was from deferred revenue (upfront payments) and this will also be lowered by around 60%. Therefore, FCF margin is expected to be only 4 pb above profit margin, that is, 16%
Revenue growth of 5% per year after 2023
Discount rate of 20%
Terminal growth rate of 3%
Margin of safety of 30%
Exit Multiples based on P/FCF Ratio
FCF 40% higher in 2026 in bull case and 20% lower in 2026 in bear case
Conclusion
Overvalued and expected returns not worth it
Speculating rather than investing if wishing that price might go up based on the news
