Education demand is driving New Oriental Education & Technology Group

The Street

Jason Su, founder and CIO of Rayliant Global Advisors, explains why he's so high on the education company's stock.

Transcript

00:00Jason Su is founder and CIO of Reliant Global Advisors. So Jason, what is your

00:07single best trade? Alright my single best trade so far and continues to be is EDU

00:15Oriental Educational Technology. Now this is a Chinese company or at least the

00:20sources most of its revenue from China but is listed as an ADR in the US. So

00:26why do you like it? Well you know a little more than three and a half years

00:30ago it was trading at a hundred and ninety six dollars a share. Today it's at

00:3778 so less than half of where it was but it's making new highs in terms of

00:43revenues and new highs in terms of profits and projected after the 50%

00:48growth this year projected to grow at another 33% on its EBITDA. So what is

00:54your price target on the stock? The consensus right now on the street is for

00:58a hundred and three dollars. Well you know at the current pace of growth right

01:04this is both the company itself but also on the backdrop of this massive China

01:08rally we're actually a bit more optimistic than that you know I I could

01:12easily see it getting close back to its historical high and just to give you

01:16some historical context you know back when it was trading a hundred ninety six

01:21there were a lot of competitors in the for-profit educational space in China

01:26and I would say in for us in the US you know for-profit education is not a thing

01:31but in China it's considered to be more important than buying your house

01:34spending money to buy a car right it's to spend money to give your kids an edge

01:38in education. It was a crowded competitive trade three and a half years

01:42ago a Chinese policy came through from Beijing that knocked out all of EDU's

01:47competitors so today it is almost the only game in town and it's now looking

01:52at higher profit margin and ever faster revenue growth. So you see the stock

01:57going back to 196 what what's the time frame around that? Well you know time

02:05frame is always the hard one I would say of the positive momentum is certainly

02:09behind it and it's more than myself right we're seeing a lot of analysts

02:13giving it an upgrade so I don't think it's beyond the possibility to see

02:18something you know over the next 12 months given the positive overall market

02:23momentum and specifically the momentum behind the stock. So what gets the stock

02:29there besides giving me a number I like to know what are the fundamentals

02:33that's going to get it from where it is right now in the 78 $79 range to get it

02:38way up to 196? I would say the big catalyst is of course shares buyback.

02:44Now the company has already come out early part of this year with an

02:48aggressive 400 million dollars shares buyback. Now the Chinese government had

02:52just made an announcement that it is going to make 300 billion dollars in

02:56terms of credit facility to companies who want to do more shares buyback and I

03:00think EDU is lining up to get along to do more of that. Of course it itself is

03:05sitting out almost five billion dollars of cash so it could fund actually a much

03:09bigger buyback. So I think that could be the catalyst signaling that the

03:13management does see this as a undervalued stock and it does signal its

03:16own competence in continuing this neck breaking growth speed right 50% earnings

03:22growth this year and projecting at least to hit 33% growth next year. So beside a

03:27stock buyback are there any other drivers that that would help move that

03:33stock up? Yeah another driver and I guess it's a longer-term driver but it's

03:37one that's get that gets talked a lot about is the fact that demand for

03:44tutoring especially for studying abroad and this is what EDU is known for right

03:48that the founder affectionately known in China as instructor Yi or professor Yi

03:54he is actually credited by most of the famous Chinese scientists entrepreneurs

03:59in the US as a man who made the foundational difference to help them

04:03score a high score on the SAT on the GMAT on GRE they come and study at the

04:07most prestigious institutions in the US. Now in China it has become again

04:13fashionable important to study abroad. I think there was a five-year law where

04:19people go or you don't want to go study abroad you want to stay in China so you

04:22don't you know miss the phenomenal growth but now with China struggling a

04:27little bit last few years a lot more people are again rethinking I need to go

04:31abroad it's a great backup plan and it may actually be the best primary plan

04:37for anyone who who's a top student right now and so that is fueling a lot of

04:42demand right now and EDU is the only game in town right now in that space. So

04:48what could go wrong with EDU what are the major risk factors? Well so it has

04:55gone up 20% in a very short spurt right so anytime a stock has done well you do

05:02have natural selling pressure people who want to take a quick profit so I think

05:07as it continues to make highs right we're gonna hit some resistance where

05:12people are looking to take profit and I think that's not just true for EDU it's

05:15broadly true for a lot of Chinese shares who in the last two weeks have have all

05:20produced spectacular gains. Now as you mentioned this is a China-based company

05:26so how much are political headwinds a challenge for this stock? Now

05:32fortunately this is a very domestic stock it's not involved in AI it's not

05:36involved in semiconductors so none of the tension or the sensitivity that's

05:41between US and China has any play on this particular stock now the fact that

05:46it's listed as ADR meaning it's gone through you know all the hoops to make

05:50itself a proper company that does proper filing it has a lot of US

05:55institutional holdings actually and so from a chassis perspective there's also

05:59no concern with this particular listed company in the US and so in some ways

06:05this is perhaps more insulated from some of the fear that we might have with some

06:09of the AI companies some of the tech platform companies that I think in the

06:13past few years has been in a crosshair for both the Chinese local regulators as

06:17well as American local regulators this is hasn't been a stock that had touched

06:21on either. So shares of EDU are up less than 10% year to date while the S&P 500

06:30is up 20% so comparatively what's holding EDU back compared to the broader

06:37market? Well you know it's been a tough year by and large for Chinese stocks

06:42until about a week ago and I would say if you were looking a week before you

06:48know EDU was probably lagging even further behind behind NASDAQ and so I

06:53think what you're finally seeing is a reversal I would say in market sentiment

06:59with people perhaps you know a bit more in a profit-taking mode in terms of

07:04maybe selling into US strength on the back of rate cut and now trying to get

07:08in on the China momentum play and again the list of ADRs being more liquid

07:13trading US time hours are the easier target for anyone who's looking to you

07:18know get back to the trade pocketing Chinese consumer confidence regaining

07:24strength. All right EDU the single best trade for Jason Su founder and chief

07:31investment officer at Reliant Global Advisors thank you for joining the

07:35street. Thank you Collin.

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