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Education. A key ingredient in bridging the gap between the known and unknown. With the advent of the Internet, it has become easier to find information and amass knowledge.
Combining education and the Internet is the online education sector. This sector is a booming one in China, home to the world’s largest population.
Revenue from the Chinese online education market reached RMB 251.8 billion (US$35.6 billion) in 2018, and it is expected to grow to RMB 543.4 billion in the following three to five years, translating to a growth rate of 16% to 24%. The development of technology and the acceptance of online training courses will underpin the growth of the Chinese online education industry.
The online penetration rate of the Chinese education industry is also said to be lower than that of other sectors such as e-commerce, news and wealth management, giving it ample room to run. Coupled with the fact that the sector is recession-resistant, there are plenty of things to like about the online education market.
With those things in mind, here are two Chinese online education stocks that investors can consider buying to profit from this fast-growing space.
Company #1: New Oriental Education & Tech
New Oriental Education & Tech Grp (NYSE: EDU) prides itself as being the “largest provider of private educational services in China”. Its products and services include English and other foreign language training, overseas and domestic test preparation courses, primary and secondary school education, as well as online education.
Recently-listed Koolearn Technology Holding Ltd (SEHK: 1797), a 68%-owned subsidiary of New Oriental, operates the online education business. Currently, New Oriental has a market capitalisation of US$17.3 billion.
New Oriental’s revenue has grown strongly over the years. In FY2014 (fiscal year ended 31 May 2014), it reported revenue of US$1.14 billion and that has grown to US$3.10 billion in FY2019, translating to a compound annual growth rate of 22%. Its earnings, however, climbed a dismal 2% per year, from US$215.7 million to US$238.1 million during the same period.
A saving grace is that the company has a strong balance sheet. As of 31 May 2019, New Oriental had US$3.19 billion in cash, term deposits and short-term investments, with only US$96.9 million in total debt.
At its share price of US$108.87, New Oriental has a price-to-earnings (PE) ratio of 73.
Company #2: TAL Education Group
TAL Education Group (NYSE: TAL), with a market capitalisation of US$4.5 billion, is another company in the online education space in China. The company has the aim of integrating the Internet and technology into education to deliver a better experience for students.
TAL, whose fiscal year ends in February each year, saw superior revenue and net profit growth compared to New Oriental. From FY2014 to FY2019, TAL’s top-line surged 52% annually (from US$313.9 million to US$2.56 billion), and its bottom-line grew 43% per annum (from US$60.6 million to US$367.2 million).
TAL started offering online courses through its Xueersi Online School in 2010 and revenue generated from the website accounted for 13.3% of its total revenue in FY2019. That figure had grown from 3.0% in FY2014. TAL expects revenues from its online course offerings to increase.
TAL’s shares are selling at US$34,76 apiece, giving a PE ratio of 57.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Sudhan P doesn’t own shares in any companies mentioned.