New Oriental Education & Technology Group (EDU)

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Yun Zhang

yi gao

Zach Scheidt

EDU(New Oriental Education&Technology Group) is a fast growing company in China, and familiarized by most of Chinese people. It is mainly doing business on foreign language training, and help students preparing language test such like ILETS, TOEFL, SAT, GMAT, GRE and etc. Today, Company's capital base is reach a saturated level, how to develop and how to invest company to earn more EVA(economic value-add) are the critical problem need to be solved later on.

Basic Profile

Vision

1. Becoming an Outstanding Educational Organization.
2. Educating the Next Generation of Chinese Leaders.
3. Promoting Cultural Exchange between China and the World.

Motto

Language Is Power！

Mission Statements

To inspire Chinese student of all ages to improve their lives and expand their horizons through a lifelong commitment to learning. By empowering students to achieve their potential, build self-confidence, and develop a global vision encompassing both traditional Chinese values and modern thinking, New Oriental is committed to training a new generation of business and community leaders.

Strategic

1. Establish new schools and learning centers with "Hub and Spoke" strategy
2. Increase student enrollments and course fees at existing facilities
3. "One stop" shop allows long term rentention of students (recurring revenues) and creates cross-sell and up-sell dynamics
4. Expand program, services and product offerings
5. Continue to strengthen existing, and pursue new, strategic relationships with education content providers and other complementary business

The New Oriental Education’s (EDU) concepts have been infiltrated into every young people’s mind in China today. The students’ age interval is broadly separated between as young as a child from kindergarten and people we already started working. The initial objective for EDU was to help its students preparing language test, such like IELTS, TOFEL, GMAT, GRE, SAT and etc. In resent years, with the China’s economy growing rapidly, the Chinese family’s income rise as well. On the other hands, the competition of high school graduate examination (Chinese SAT) is so stinging. Most of high school graduated students can pass this exam but colleges could admit only few students. The amounts of people who graduate from high school increase a lot yearly. The middle and high school students bear much more pressure than before, but even study hard, some students still cannot get required score for good colleges. Under this serious circumstance, many Chinese students want to avoid high school graduate examination (Chinese SAT), so they want to seek another way to acquire high education. Study aboard to foreign countries had been not a new concept for Chinese students any more today, but it still is an attractive idea. New Oriental Education’s builder Minhong Yu was the earliest person, who noticed this business chance, and started running company in 1993. The company growing so rapidly, the company went to IPO in sep.7 2006. The first stock price was around $15, and today, its stock price is $97, and the highest price in 52 week was $116. Today, EDU’s learning centers cover every province in China, and have millions of students enroll for classes every year.

The company has traditionally been in the business of teaching English to Chinese students who are on break between semesters. While EDU has been extremely successful in this business and has developed a well known brand name, management is now looking for ways to leverage this strength into new initiatives. Most recently, the company has decided to enter the preparatory education industry by preparing students for the standardized Gaokao test that is required for college admission.

Milestones

• 1993: Beijing New Oriental school is established, Nov 16, 1993.
• 1995: Number of student enrollments reaches 15,000.
• 2000: Shanghai and Guangzhou New Oriental Schools are established and become the largest English training school in their respective regions.
• 2002: Wuhan, Xi'an, Tianjing and Nanjing New Oriental school are established. Also, the first New Oriental international elementary educational institution, which is Beijing New Oriental Foreign Lauguage school, is established in Yangzhou.
• 2003: Chengdu, Chongqing, Shenyang and Shenzhen New Oriental Schools are established.
• 2004: Xiangfan New Oriental School is established. Tiger Technology Private Inc. invest $22 mm for 18.9% stake.
• 2005: The cumulative number of registered students reaches an estimate 3 million. Number of faculty and staff grow to over 4,000. Changsha, Jinan, Harbin, Hangzhou, Zhengzhou, Changchun and Taiyuan New Oriental Schools are established.
• 2006: New Oriental School successfully came into the NYSE, Sep 7, 2006, became the first Chinese education company who entered into United States market. In the meantime, Zhuzhou, Shijiazhuang, and Suzhou New Oriental Schools are established.
• 2007: 1,000,000 students enrollment. 10 new schools opened including Kunming and Fuzhou.

• Until now, New Oriental School includes 41 short-term language training school, 447 learning centers, 25 New Oriental bookstores, over 5,000 third-party bookstores, 1 vocational school, 2 kindergarten, 2 College entrance exam school, and over 10,800 teachers in 43 cities.

Campus Network

New Oriental is well established in China, and they are rapidly expanding. View the locations of our branches on the map Left. No other private education services provider in China can match the scale and reach of New Oriental's network.

Business Overview

Diversification Services

The current education system requires all students who wish to enter college to take and pass this standardized test. Unfortunately, despite a widespread desire to enter such programs (as evidenced by the rising number of students taking the standardized test), there is only a 60% pass rate. With the pressure of population, and parent's hope their children will have a bright future, EDU sees this as a ripe opportunity to offer study classes to better prepare students to pass the test. The company is so confident that this new market will yield profits that it recently acquired Mingshitang (a Beijing private school) in order to roll out its classes. The more traditional schooling will offer several benefits to the company as it will be able to leverage its strong brand name to a new group of students, and cross sell coursework to its existing database. Also, the test preparatory business runs countercyclical to the English classes the company has built its business on.

The image below shows that, now they provides a comprehensive range of educational services and products to address the needs of students of all ages. From Kinderdance, such as POP Kids program and summer camps to full primary and middle school education, lifelong education with New Oriental begins as early as age 3.

In order to achieve EDU's mission, they offers a trusted teacher and advisor – whether the task is preparing for the Chinese high school or college entrance exams, getting ready to take the international exams for overseas universities, or learning the skills most valued by today's employers. What's more, they reach adult students with Adult Practical English and ELITE English programs, occupational test preparation, online education, career education, and popular educational publications.

Foreign Language Training

As their motto suggests, language training is at the core of New Oriental's business. New Oriental Education no longer just focus on English teaching. While English is by far the most popular language they teach, during resent years, EDU made a big progress in extend its languages teaching bases. EDU have ability to provide courses in German, French, Japanese, Korean, Spanish, Italy, and Russian, the language will contain more in the future. Due to the students come from a wide range of educational backgrounds and have differing goals, motivations and abilities, but they all share a common purpose: achieving a brighter future through mastery of a foreign language. In order to reflecting this diversity, EDU has a lot of classes base on specialization, these classes have specific target group (divided by age): · Kids (Ages 5-12) · Middle and High School Students (Ages 12 – 18) · English for Adults (Ages 18+) · Elite English Personalized Study (All Ages)

Test Preparation

As globalization and the improvement in standard living, more and more people want get certificate of certain exam or go abroad to see the outside world. Adopt to this situation, EDU provides test preparation courses for major exams used by educational institutions in China and abroad.

The classes are focus on quality instruction and test-taking techniques designed to help students achieve high scores on the most widely used admissions and assessments tests. Classes range from 50 to 500 students, depending on level of instruction and student demand, and programs range from 20 to 160 hours with classes one to four times per week. They also offer intensive versions of our courses, which can be completed in shorter time periods.

Student-Abroad Agency

EDU has a Student-Abroad Agency segment which is called Vision Overseas. In resent years, Chinese people are very familiar with Student-Abroad Agency, since an increasing number of Chinese students are considering opportunities to study abroad. This kind of agency has profession experiences on director students to prepare any necessary information or data for study abroad, which they offers a full suite of services to help students achieve includes helping students choose target foreign school, helping students to fill in application form, search scholarship and helping students to collect materials that need to be shown to visa officer, – and get the most out of – their dream of international study.

VIP class

Just like its name 'VIP class' offer some high income family in china which willing send their children to study in foreign country. The class offer a highest quality services to this consumers group, often one teacher only charge of one student. Sometimes, EDU guarantee the students who choose this service can get a high score. The tuition expense for choosing this service is much more expensive than other ways, but there are still a lot of parents willing to pay in China.

Online Version

Koolearn online platform is developed rapidly these years, with the purpose of responding to the market need for greater flexibility in class scheduling and delivery, especially among Chinese working adults. You have a chance to learn Business English, Finance, Management, and IT training at home. In addition, KooLearn has relationships with top Chinese companies and multinationals to provide customized online training packages benefit for their employees.

The Way EDU Doing Business

EDU has one or several leaning center in almost every big cities in China, but it still impossible to contain all of the students, and hard to deal with the students come from out-of-town. The general way EDU does is to set learning center as service center, and rent local hotels or college classrooms. When the semester begin, students come to register class at learning center fist, wait until all students arrive, then send them to a different hotels or colleges base on different courses. Sometimes, especially in winter or summer holidays, a college or a hotel may contain several study groups(some groups come to study TOFEL some come to study GRE etc) from EDU.

Content Distribution

EDU published a wide range of popular educational materials: books, software, CD-ROMs, magazines and other periodicals for language training and test preparation, as well as self-help, know-how and inspirational books.

Their extensive distribution channels have attracted international education providers to cooperate. They currently have arrangements with Pearson Education, The McGraw-Hill Companies and Cambridge University Press, or their respective authorized local publishers, to develop and distribute localized versions of selected educational materials in China bearing both EDU logo and the original publisher's logo.

SWOT Analysis

Strength

New Oriental Education & Technology Group have very steady growth year after year. Its sustainable competitive advantages:

*Brand Loyalty
*Entensive Nationwide Network
*Best Teachers
*Best Proprietary Content
*Proprietary Computerized Assessment Testing
*One-to-one Customer service and Study Consulting

Its aggressive extend strategy is very successful. The most amazing thing for EDU is the company doesn't have any long term debt, and the working capital is outstanding, because current assets is much higher than current liability. The company's headquarters is located in Beijing where is the capital of China. Students can enroll for classes by different ways, they can go to learning center, or they can just choose classes on the internet. The statistics show that there are about 75% students who are currently studying abroad in America and Canada had attended EDU before, and other lots of facts show students' succeed after they received education from EDU. All of the factors make students who have dream to study abroad put New Oriental Education as their first choice. Day after day, the EDU's brand name have been known by almost every people in China, and also brand loyalty had being established among its customers. In order to attract great teachers to join and contribute to organization, EDU sign agreements to pay very high compensation. This leads to more and more teachers choose to work for EDU, who have professional skills and abundant experiences. The chart indicted that there is at least 10% growth in English training market and after school tutoring market. At this tendency, we could see the future for EDU is pretty bright and contain huge potential.

Weakness

EDU have huge students bases, but the capacity can not loading all of the students. Lot's of students complain that it's hard to enroll class at their perfect timing and location. How about if EDU continue its capital bases? Seems it is not good idea. EDU's base is manage and operating company, if EDU keep extending its capital its profit margin may decrease due to the increase in operating expenses. Also, new oriental's business is more or less relate to seasonal, the most profit season is 3rd quarter of the year(from May to August). For other seasons, the business far away behind than 3rd quarter, but the operating expanse in these 3 quarters are usually high.

What was worse, third parties have in the past brought intellectual property infringement claims against EDU based on the content of the books. For example, in January 2001, the Graduate Management Admission Council (GMAC), and Educational Testing Service (ETS), filed three separate lawsuits against New Oriental in the Beijing No. 1 Intermediate People’s Court, alleging that they had violated the copyrights and trademarks relating to the GMAT test owned by GMAC and relating to the GRE and TOEFL tests owned by ETS by duplicating, selling and distributing their test materials without their authorization. But a final judgment issued by the Beijing Higher People’s Court in December 2004 announce that EDU had not misused the trademarks of GMAC or ETS. However, although the company follow the PRC intellectual property law and respect the copyright in reasonable use, they cannot assure that every teacher or other personnel will strictly comply with these policies. This event has negative impact on the their public figure and inevitable could result in increased expenses, loss in revenues.

Opportunity

The success of New Oriental business depends primarily on the number of student enrollments in our courses and the amount of course fees that our students are willing to pay. EDU really needs to increase its business level in 1st 2nd and 4th quarters, but this goal is very hard to achieve, because all students are in the regular seasons in primary school, middle school and high school etc. This problem is really hard to solve. Thus, their ability to continue to attract students to enroll in courses without a significant decrease in course fees is critical to the continued success and growth of their business. This in turn will depend on several factors, including the ability to develop new programs and enhance existing programs to respond to changes in market trends and student demands, expand geographic reach, manage potential growth while maintaining the consistency of teaching quality. If we are able to continue to attract a significant amount of students to enroll in our courses, maintaining profitability seems guarantee.

Threat

On one hand, terrorist attacks, geopolitical uncertainty and international conflicts involving the U.S. and elsewhere, such as those that took place on September 11, 2001, could have an adverse effect on their overseas test preparation courses and English language training courses. Such attacks may discourage students from studying in the United States and elsewhere outside of China and may also make it more difficult for Chinese students to obtain visas to study abroad.These factors could cause declines in the student enrollments and could have an adverse effect on overall business and results of operation.

As part of EDU business strategy, they have pursued and intend to continue selective strategic acquisitions of businesses that complement existing business. For example, in June 2008, they acquired a 60% equity stake in Beijing Haidian Mingshitang Exam Training Education School, or Mingshitang School, a Beijing−based private school that specializes in tutoring students seeking to retake the “gaokao,” the Chinese college entrance examination. In September 2008, they acquired Changchun Tongwen Gaokao Training Education School, or Tongwen Gaokao School, a Changchun−based private school that provides similar services to those provided by Mingshitang School. These strategic acquisitions are expected to allow EDU to extend the New Oriental brand to the large non−English test preparation market. However, violent acquisitions and any future acquisitions expose EDU to potential risks, including business culture, risks associated with the diversion of resources from existing businesses, difficulty in successfully integrating the acquired businesses, loss in goodwill by inability to generate sufficient revenue to offset the costs and expenses of acquisitions.

On the other hand, from the inside of company, New Oriental school had being employed a number of new teachers recently, most of their ages are very young, there are even some just graduated from college. People start to worried about EDU's teaching performance level. The general questions are do they have ability to catch up new concept of teaching, do they equally skillful even in different location, do they have the same feeling on responsibility as a elder teachers do. The tests' content is changing overtime, can EDU offer much closer learning materials to students. From the outside of the company, more and more competitors entered this market in China. For instance, EDU face nationwide competition for their IELTS preparation courses from Global IELTS School, which offers IELTS preparation courses in many cities in China. They face regional competition for English for children program from several competitors that focus on children’s English language training in specific regions, including English First. They face competition for “Elite English” program primarily from Wall Street Institute and English First, both of which offer English language training courses for adults in many cities. Wall Street Institute began providing high−end English language training courses to adults in major cities several years before EDU entered this market and enjoys a first−mover advantage.

Financial Metrics

Historical Performance

EDU shows stable operating results during the past five years (since they entered into NYSE). The company improve its revenue and EBITDA by a Compounded Annual Growth Rate (CAGR) of 42.2%, from 2006 through 2010. Recently, CAGR is still high as 36.8%. Even though it isn't the actual return in reality. The higher number in CAGR predict that EDU is a safe investment which could gain smooth returns. Operating revenues have increased in recently due to higher market demand of education services, expand book sales. These increases in revenues have also had favorable impacts on EBITDA, which would counteract the effects of some bad influence. For example, operating revenue have experienced, and expect to continue to experience, float up and down due to seasonal fluctuations. Historically, their courses tend to have the largest student enrollments in our first fiscal quarter from June 1 to August 31 each year, primarily because many students enroll in our courses during the summer vacation to enhance their foreign language skills and/or prepare for admissions and assessment tests in subsequent school terms. In addition, they have generally experienced larger student enrollments in our third fiscal quarter from December 1 to February 28 each year, primarily because many students enroll in our language training and other courses during the winter school holidays. However, expenses vary significantly and do not necessarily correspond with changes in student enrollments and revenues. Making investments in marketing and promotion, teacher recruitment and training, and product development throughout the year make situation difference. What's more, a special events that take place during a quarter when student enrollment would normally be high, may have a negative impact. For example, the Beijing Olympic Games held in August 2008 negatively impacted EDU business in the fiscal quarter ended August 31, 2008 due to transportation and security logistics arrangements in Beijing and some distractions from classes as the nation enjoyed the Olympic Games.

The company has kept a consistent modest debt level in recent years while increasing liquidity. EDU has maintained approximately $0.168 million debt level. Addtional, the copany has maintained strong cash flows and liquidity historically. The added availability for the facility continues to strengthen the company's liquidity position in the case of increasing collateral requirement.

Financial Ratio Highlight

Human Resouces

Key Personnel

• Michael Minhong Yu: the founder of New Oriental and serves as the Chairman of the Board. He is also the Vice Chairman of the Beijing Young Entrepreneurs Association and Vice Chairman of the Committee of Education of the Central Committee of the China Democratic League. His famous word inspired thousands upon thousands teenagers. Prior to founding New Oriental, Mr. Yu was an English instructor at Peking University between 1985 and 1991. Mr. Yu received his bachelor’s degree in English from Peking University.

• Xiangdong Chen: Executive President since November 2010. He has joined New Oriental in 1999, and was promoted to be the executive assistant to our chief executive officer in 2001. From 2002 to September 2003, he was the president of Wuhan New Oriental School. Mr. Chen became vice president in September 2003 and has been in charge of a number of departments at New Oriental's head office, including short-term training, human resources, marketing and public relations, and business development. From January 2006 to October 2010, he was senior vice president. Mr. Chen received his master's degree in Economics and Ph.D. degree in Economics from Renmin University of China. Mr. Chen attended the Executive Management program at the Harvard Business School in 2005.

• Yunlong Sha: Senior Vice President since November 2010. He first joined New Oriental in 2001, and has served as the director of the Foreign Examination Department at the Beijing New Oriental School and the headmaster of the Guangzhou New Oriental School. Mr. Sha became the Regional Vice President of New Oriental in January 2006, overseeing the northeast China business. From March 2007 to October 2010, he was the vice president of New Oriental and the headmaster of Beijing New Oriental School. Prior to joining New Oriental, Mr. Sha was the headmaster of New World English School where he opened and managed branch schools in Shenyang and Dalian. Previously, he was an assistant lawyer and a journalist at Dalian TV Station. Mr. Sha holds an executive diploma in Management from the Hong Kong University of Science and Technology, and an B.A. in Law from Renmin University, China.

• Louis Hsieh: Chief Financial Officer since December 2005, as Board Director since March 2007 and as President since May 2009. Prior to joining New Oriental, Mr. Hsieh was the chief financial officer of ARIO Data Networks, Inc. in San Jose, California from April 2004. From 2002 to 2003, Mr. Hsieh was a managing director for private equity firm Darby Asia Investors (HK) Limited. Prior to that, Mr. Hsieh was managing director and Asia-Pacific tech/media/telecoms head of UBS Capital Asia Pacific, the private equity division of UBS AG from 2000. Over the period from 1997 to 2000, Mr. Hsieh was a technology investment banker at JP Morgan in San Francisco, California, where he was a vice president, and Credit Suisse First Boston in Palo Alto, California, where he was an associate. From 1990 to 1996, Mr. Hsieh was a corporate and securities attorney at White & Case LLP in Los Angeles and is a member of the California bar. Mr. Hsieh holds a B.S. degree in Industrial Engineering and Engineering Management from Stanford University, an MBA degree from the Harvard Business School, and a J.D. degree from the University of California at Berkeley.

• Chenggang Zhou: Director and Senior Vice President since November 2010. From 2000 to 2003, Mr. Zhou was principal in charge of Shanghai New Oriental School. In 2003, Mr. Zhou took the role of vice president at New Oriental and has been in charge of Beijing New Oriental School since that time, and he became our executive vice president in December 2006. From 1998 to 2000, Mr. Zhou was a correspondent for the Asia Pacific region and a program host at BBC. Mr. Zhou received his bachelor's degree in English from Suzhou University and his master's degree in Communications from Macquarie University, Australia.

• Xiuwen Wang: Vice President since January 2006. Mr. Wang is currently the headmaster of the Beijing New Oriental Foreign Language School. Mr. Wang holds a Ph.D. in Education Management from Pennsylvania State University, USA, an M.A. in Education Management from the University of Edinburgh, United Kingdom, and a BA from Shandong University of Technologies, China.

• John Zhuang Yang: Director since September 2007. Dr. Yang received his Ph.D. in Business Administration from Columbia University, New York in 1991, majoring in management. He got his M.A. in Sociology from the same institution in 1985. He was also granted an MPA degree in International and Public Affairs from The Woodrow Wilson School of Public and International Affairs of Princeton University in 1984. He graduated from the English Language and Literature Department of Peking University, China. Dr. Yang's main teaching and research interests involve Fundamentals of Management, Human Resource Management, Comparative Management, Corporate Culture, key success factors of MNC strategies and Management in China, Leadership and Organizational Behavior. He has published a large number of articles and columns in leading academic journals and business press in China and the United States.

• Robin Li: Director since September 2006. Mr. Li is Chairman and Chief Executive Officer of Baidu, the leading Chinese language Internet search provider. Prior to founding Baidu, Mr. Li worked as a staff engineer for Infoseek, a pioneer in the Internet search engine industry, from July 1997 to December 1999, and he was a senior consultant for IDD Information Services from May 1994 to June 1997. Robin Li received a Master of Science Degree in Computer Science from The State University of New York at Buffalo and a Bachelor of Science Degree in Information Management from Peking University.

• Denny Lee: Director since September 2006. Mr. Lee was a Director and Chief Financial Officer of NetEase, one of China's leading Internet and online game services providers. Prior to joining NetEase, Mr. Lee worked in the Hong Kong office of KPMG for more than ten years specializing in auditing international clients. During his employment with KPMG, he also worked with a number of Chinese companies on their initial public offerings on the Hong Kong Stock Exchange, conducted due diligence work for potential foreign investments in Chinese companies. Mr. Lee graduated from Hong Kong Polytechnic University and majored in accounting. Mr. Lee is a member of the Chartered Association of Certified Accountants and the Hong Kong Society of Accountants.

EDU's corporate governance policies are designed to protect the interests of our shareholders, and promote responsible business practices and corporate citizenship. They are committed to employing the principles and values of these policies throughout our day to day business. The management structure and Board of Directors proved that they are exactly follow the policies. It is not difficult to find out that all of the all the leaders in New Oriental School has its strong education background and special personal experience. In fact, just because their diversified background and individual insight leading EDU expanditure in China and known as the whole world.

Chairman's Words

"Hew a stone of hope out of a mountain of despair and you can make your life a splendid one."

In the beginning, there were no roads in the world; only as people began traveling did roads come into being. Successful roads are formed not when people roam aimlessly, but when they are headed in the same direction. The same is true for New Oriental; it was formed as people gathered to study. And like a successful road, it did not achieve its success by chance. People who shared dreams and aspirations worked together to forge an exciting trail.

The road ahead will be even longer and more arduous, because our goals are even grander. But with a clear mission, dedicated hearts and the pioneering spirit that has driven us from the beginning, we're certain that our strength, wisdom, and energy will enable us to write a new page in the records of China's educational undertaking.

——Michael Minhong Yu Founder, Chairman, and Chief Executive Officer

Ethos(Leadership)

The New Oriental School strives with all its energy for constant improvement. It embodies a pioneer spirit, boldly looking forward, and pushing ahead without looking back. We believe that, as everything in this ephemeral world fades into the oblivion of the past, the only thing that remains treasured in our heart is that which we earn with our hard work today. In the years to come, using our heads but guided by our hearts, learning from past failures and successes alike, we shall apply ourselves towards an ultimate brilliant success.

References

[1] Balance Sheet

[2] Income Statement

[3] Cash Flow

[4] Coporate Fact Sheet

[5] New Oriental School SEC 10-F 2010

[6] What's the Margin Trend at New Oriental Education?

[7] Official website

[8] New Oriental Education & Technology Group Inc (EDU)

[9] U.S., China online education firms to merge

[10] Highlights from Chinese Education Provider New Oriental's IPO Filing