Can EDU Stock Soar as it Strategically Diversifies into Education and Tourism Markets?

U.S. stocks notched their third consecutive week of gains as investors await this week’s Fed decision and employment data. The best-performing industries are lidar concept, hydrogen energy and China education stocks.

Considering the different perceptions of the stock, this time TigerPicks chose $New Oriental Education & Technology(EDU)$ to have a fundamental highlight to help users understand it better.

$New Oriental Education & Technology(EDU)$

New Oriental's stock has skyrocketed 181% so far this year, primarily benefitting from the recovery in education market. As the top dog in tutoring space, New Oriental stands to win big thanks to shifts in the competitive landscape, making it a stock worth watching for investors.

New Oriental's Strategic Moves Post-Pandemic

The same dynamic is at play with New Oriental here. A key change is that all tutoring companies register as non-profits. And their operations now require approval rather than just filings. As a result, tons of players failed to get licenses.

For investors, this regulation handed New Oriental a golden ticket to cement dominance given drastically reduced competition.

And on the supply side, after the COVID and the policy, we have seen a lot of players disappear from the market. So that means we're facing less competition. So I think the existing business, including the overseas related business and the adult and college students business, I think we will generate the top line growth very good in the next two to three years.

Expanding into the Booming Study Abroad and Overseas Education Market

For starters, China's study abroad industry bounced back to RMB $310 billion this year, rising 12% after the pandemic gutted it. As flight routes reopen post-COVID, overseas applications should continue recovering.

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Just look at US universities - for the 2022-2023 season, nearly 750,000 students applied for undergrad, up 25% over pre-pandemic levels. With over 65,000 international applicants, China remains the top source country. As US-China travel restrictions ease, we could see the growth rate in Chinese students heading there pick up pace.

New Oriental called out robust demand growth in education, especially for overseas learning services. With an appetite for tutoring rebounding post-COVID, it’s bullish on expansion. Specifically, management looks to boost learning center capacity by 15-20%.

With regards to the learning center and classroom space, we plan to increase our capacity by about 15% to 20%, by which a reasonable amount of new learning centers is expected to be opened.

East Buy Live-streaming Success and New Ventures

In addition, New Oriental is executing a multi-platform strategy for its East Buy Selection live-streaming program via Douyin, Taobao, and its app.

A year ago, East Buy shot to fame overnight for its bilingual sales pitches and knowledge-sharing model. It finally gained traction after previous false starts in live commerce for New Oriental. Back then East Buy focused on farm goods and daily necessities.

But it gradually shifted outdoors - wandering scenic areas while live-streaming and peddling local specialties. Then tourism products entered the mix. On July 19th, New Oriental formally launched a culture and tourism subsidiary, followed by an announcement on July 21st to officially pursue this new vertical. The goal is to tap into heritage tourism and cultural travel. New Oriental backed this new initiative with a RMB $1 billion capital injection, showing its commitment.

Well before its recent tourism subsidiary launch, New Oriental already expanded East Buy Selection’s live-streaming sales to cover travel products. Last November, it kicked off an East Buy spinoff channel called “See the World.” In just three months, See the World has nearly 3 million followers, over 1,000 posts, and 173 million likes. It’s hosted close to 90 live-streaming sessions already. So clear early traction.

Tapping into the Senior Tourism Market

With its tourism push, New Oriental is wisely targeting seniors - a demographic with major wanderlust and money to burn. Surveys show Chinese travelers aged 60+ have averaged 23% annual spending growth on tourism since 2016. Last year alone they dropped over 1 trillion yuan on trips. Seniors now account for over 20% of Chinese travelers. Their continued demand expansion makes them a lucrative focus area. Although the market isn’t short on senior travel products, more customized, experiential mid-to-high-end offerings remain sparse. New Oriental's fledgling tourism unit has already established local branches across provinces like Shaanxi, Gansu, Zhejiang, and Xinjiang. It dropped various tour packages priced from $4000-6000 RMB. Take Xinjiang - its western region saw a red-hot 90% government spending budget increase for travel in 2022.

Competitive advantage

New Oriental wants to be their go-to for aspirational excursions across China and abroad. Early data suggests East Buy’s hosts and curated local insights resonate with older viewers. As an educator, New Oriental is well-positioned to deliver more interactive, enriching excursions. Its teachers bring communicative flair and extensive knowledge to animate tour guide roles. Their deeper dives into local history, culture, and nature help the brand stand out. The live-streaming format also enables two-way engagement unseen in traditional packaged tours. New Oriental can leverage its agricultural and rural roots here too - combining live-streamed farm and village tours with its budding tourism play.

Given its RMB 1 billion capitalization, heavy asset investments seem likely beyond guided excursions. Most Chinese attractions still lack robust commercial planning, so New Oriental could leverage its storytelling skills for destination development.

Valuation

New Oriental still trades below its 2020 highs.

But with profits bouncing back to pre-pandemic levels and free cash flow reaching new highs, recent share price gains make sense. Still, further upside seems likely given a couple of key tailwinds:

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Management sees ample runway to keep gaining market share and pushing earnings higher amid lessened competition.

Second, domestic tourism in China totaled RMB $2 trillion last year - over 6x tutoring's market value. So if New Oriental leverages its teaching talent to carve out a slice of surging senior travel demand, substantial value could still get unlocked. So at ~36x forward earnings, New Oriental still looks reasonably priced given the dynamics at play.

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Risk

Tourism ventures typically take years to pay off, so picking winning projects and building standout in-house IP pose tough tests.

Delivering quality travel hinges on securing extensive offline resources - attractions, hotels, transport, and dining. Moreover, as the sector shifts from resource-driven to creativity-driven, visitors want more unique, experiential offerings. That pressures talent needs in product design where New Oriental is unproven.

Right now its advantage lies more with teachers turned tour guides or guest services via training. However, teachers don't make great sales reps to negotiate partnerships across the fragmented travel supply chain.

So in the near term, New Oriental must still rely on established online travel agencies and veteran suppliers to assemble components. Integrating the full value chain is no small feat for any new entrant. Industry veterans with over a decade of network building maintain an edge that could take years to replicate.

The key uncertainty is whether New Oriental can inject enough educational creativity to offset its backend weaknesses in areas like operations and distribution. While senior travelers present a target demographic sweet spot, extracting that value profitably demands comprehensive tourism capabilities.

Conclusion

New Oriental’s resurgence despite the turmoil signals it likely won backing for its strategic direction.

We also see promising new growth shoots that showcase business diversification skills. On valuation, continued education share gains plus budding tourism traction should unlock substantial upside.

So for a quality brand that aligned itself to policy tailwinds, the current multiple looks attractive. Major competitive and sector developments could extend its rebound.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

The 21 analysts offering 12-month price forecasts for New Oriental Education & Technology Group Inc have a median target of 92.00, with a high estimate of 114.00 and a low estimate of 75.60. The median estimate represents a +15.09% increase from the last price of 79.94.

Resource:

https://seekingalpha.com/article/4655621-new-oriental-education-pivot

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