The Motley Fool

Better Buy: New Oriental Education or Koolearn Technology?

China’s private education market is growing. Which leading Chinese private education company is the better buy?

China’s private education sector is growing. 

As the average Chinese household income increases, parents have more money to invest in their children. This money is often invested in the private education sector, which includes both online tutoring and physical tutoring services.

Two Chinese companies that dominate this space are New Oriental Education & Tech Grp (NYSE: EDU) and Koolearn Technology Holding Ltd (SEHK: 1797)

New Oriental Education is a leading private education company in China, providing test preparation courses and tutoring. Koolearn Technology is a leading online private education company that offers similar services online. 

Which is the better buy?

Diversification versus pure play

While they are technically competitors, New Oriental Education and Koolearn Technology Holding share a common heritage. 

New Oriental Education founded Koolearn Technology, and New Oriental Education still owns a large percent of Koolean Technology. That means if Koolearn Technology performs well, New Oriental Education will benefit from the higher valuation. 

The real question is whether investors prefer an online pure play like Koolearn Technology, or if they prefer more diversification like that offered by New Oriental Education. New Oriental Education gives investors exposure to both the physical private education space, in the form of tutoring, and the digital education space, through owning a portion of Koolearn Technology. 

Although the answer to the question differs from investor to investor, diversification is generally better because it could potentially reduce the volatility in cash flows. 

If there is too much competition in the online education space, New Oriental Education’s physical schools will give them an edge on the market. This can help them remain valuable. 

Winner: New Oriental Education

Growth 

In terms of annual growth rate, Koolearn Technology’s total sales rose 41.3% year-on-year to RMB 918.9 million for the 2019 fiscal year. 

For its 2019 fiscal year, New Oriental Education’s sales rose 26.5% year-on-year to US$3.09 billion. 

Koolearn Technology has the advantage in terms of future growth rate since it can grow simply by posting new links online. New Oriental Education has to build facilities to expand physically. 

In terms of the present Wuhan coronavirus, Koolearn Technology could potentially gain more new customers than New Oriental Education because Koolearn Technology is online. 

Winner: Koolearn Technology

Valuation

Due to it operating in a less mature market, Koolearn Technology is more focused on growth than profit. As a result, many analysts don’t expect Koolearn Technology to be profitable. 

In terms of price to sales, Koolearn Technology had a 2019 price-to-sales ratio of around 11:88 and a current price to sales ratio of around 16:11. 

Because it operates in a more mature market, analysts expect New Oriental Education to earn a profit. New Oriental Education has a forward price-to-earnings ratio of around 36.76.

New Oriental Education is also cheaper in terms of price to sales. The company’s current price to sales is around 5:68.

Winner: New Oriental Education

Foolish Conclusion

Although Koolearn Technology has more growth potential, New Oriental Education is more diversified and has arguably a more attractive valuation. 

Investors willing to take on more risk should consider Koolearn Technology because of its growth potential.  More conservative investors may prefer New Oriental Education. 

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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 Jay Yao doesn't own shares in any companies mentioned.