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The China education stock dominating this manager's mind
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Here's why a portfolio manager with decades of success is highlighting a for-profit education stock amid China market rally.
Transcript:
Conway Gittens: Jason Su is founder and CIO of reliant Global Advisors. So Jason, what is your single best trade?
Jason Hsu: My single best trade, so far and continues to be, is EDU, Oriental Education and Technology. Now, this is a Chinese company, or at least a source of most of its revenue from China, but is listed as an ADR in the U.S.
Conway Gittens: So why do you like it?
Jason Hsu: Well, a little more than 3 and 1/2 years ago, it was trading at $196 a share. Today it's at $78, so less than half of where it was. But it's making new highs in terms of revenues and new highs in terms of profits. And projected after the 50% growth this year projected to grow at another 33% on its EBITDA.
Conway Gittens: So what is your price target on the stock? The consensus right now in the street is for $103.
Jason Hsu: Well at the current pace of growth. This is both the company itself, but also on the backdrop of this massive China rally, we're actually a bit more optimistic than that know. I can easily see it getting close back to its historical high. And just to give you some historical context, back when it was trading $196, there were a lot of competitors in for profit educational space in China. And I would say for us in the U.S. for profit education is not a thing. But in China it's considered to be more important than buying your house, spending money to buy a car. It's to spend money to give your kids an edge in education. It was a crowded, competitive trade. 3 and 1/2 years ago, a Chinese policy came through from Beijing that knocked out all of its competitors. So today it is almost the only game in town. And it's now looking at higher profit margin and ever faster revenue growth.
Conway Gittens: So you see the stock going back to 196 - what's the time frame around that?
Jason Hsu: Well, the time frame is always the hard one. I would say, the positive momentum is certainly behind it and it's more than myself. We're seeing a lot of analysts giving it an upgrade. So I don't think it's beyond the possibility to see something, over the next 12 months, given the positive overall market momentum and specifically the momentum behind the stock.
Conway Gittens: So what gets the stock there? Besides giving me a number, I'd like to know what are the fundamentals that's going to get it from where it is right now in the $78, $79 range to get it way up to $196?
Jason Hsu: I would say the big catalyst is, of course, is shares buyback. Now, the company has already come out early part of this year with an aggressive $400 million share buyback. Now, the Chinese government had just made an announcement that it is going to make $300 billion in terms of credit facility to companies who want to do more shares buyback and I think EDU is lining up to get along to do more of that. Of course, in itself is sitting out almost $5 billion of cash. So it could fund, actually, a much bigger buyback. So I think that could be the catalyst signaling that the management does see this as an undervalued stock and it does signal its own confidence in continuing this neck breaking growth speed, 50% earnings growth this year and projecting at least to hit 33% growth next year.
Conway Gittens: So beside a stock buyback, are there any other drivers that would help move that stock up?
Jason Hsu: Yeah, another driver, and guess it's a longer term driver, but it's one that gets talked a lot about is the fact that demand for tutoring, especially for studying abroad. And this is what is known for. The founder, affectionately known in China as instructor G or Professor G. He is actually credited by most of the famous Chinese scientists, entrepreneurs in the US as a man who made the foundational difference to help them score high score on the GMAT or GRE. They come and study at the most prestigious institutions in the US. Now in China, it has become again fashionably important to study abroad. I think there was a five-year low where people go “you don't want to go study abroad, you want to stay in China.” So you don't miss the phenomenal growth. But now with China struggling a little bit last few years, a lot more people are again rethinking, “I need to go abroad.” It's a great backup plan and it may actually be the best primary plan for anyone who's a top student right now. And so that is fueling a lot of demand right now. And is the only game in town right now in that space.
#china #education #stocks
Transcript:
Conway Gittens: Jason Su is founder and CIO of reliant Global Advisors. So Jason, what is your single best trade?
Jason Hsu: My single best trade, so far and continues to be, is EDU, Oriental Education and Technology. Now, this is a Chinese company, or at least a source of most of its revenue from China, but is listed as an ADR in the U.S.
Conway Gittens: So why do you like it?
Jason Hsu: Well, a little more than 3 and 1/2 years ago, it was trading at $196 a share. Today it's at $78, so less than half of where it was. But it's making new highs in terms of revenues and new highs in terms of profits. And projected after the 50% growth this year projected to grow at another 33% on its EBITDA.
Conway Gittens: So what is your price target on the stock? The consensus right now in the street is for $103.
Jason Hsu: Well at the current pace of growth. This is both the company itself, but also on the backdrop of this massive China rally, we're actually a bit more optimistic than that know. I can easily see it getting close back to its historical high. And just to give you some historical context, back when it was trading $196, there were a lot of competitors in for profit educational space in China. And I would say for us in the U.S. for profit education is not a thing. But in China it's considered to be more important than buying your house, spending money to buy a car. It's to spend money to give your kids an edge in education. It was a crowded, competitive trade. 3 and 1/2 years ago, a Chinese policy came through from Beijing that knocked out all of its competitors. So today it is almost the only game in town. And it's now looking at higher profit margin and ever faster revenue growth.
Conway Gittens: So you see the stock going back to 196 - what's the time frame around that?
Jason Hsu: Well, the time frame is always the hard one. I would say, the positive momentum is certainly behind it and it's more than myself. We're seeing a lot of analysts giving it an upgrade. So I don't think it's beyond the possibility to see something, over the next 12 months, given the positive overall market momentum and specifically the momentum behind the stock.
Conway Gittens: So what gets the stock there? Besides giving me a number, I'd like to know what are the fundamentals that's going to get it from where it is right now in the $78, $79 range to get it way up to $196?
Jason Hsu: I would say the big catalyst is, of course, is shares buyback. Now, the company has already come out early part of this year with an aggressive $400 million share buyback. Now, the Chinese government had just made an announcement that it is going to make $300 billion in terms of credit facility to companies who want to do more shares buyback and I think EDU is lining up to get along to do more of that. Of course, in itself is sitting out almost $5 billion of cash. So it could fund, actually, a much bigger buyback. So I think that could be the catalyst signaling that the management does see this as an undervalued stock and it does signal its own confidence in continuing this neck breaking growth speed, 50% earnings growth this year and projecting at least to hit 33% growth next year.
Conway Gittens: So beside a stock buyback, are there any other drivers that would help move that stock up?
Jason Hsu: Yeah, another driver, and guess it's a longer term driver, but it's one that gets talked a lot about is the fact that demand for tutoring, especially for studying abroad. And this is what is known for. The founder, affectionately known in China as instructor G or Professor G. He is actually credited by most of the famous Chinese scientists, entrepreneurs in the US as a man who made the foundational difference to help them score high score on the GMAT or GRE. They come and study at the most prestigious institutions in the US. Now in China, it has become again fashionably important to study abroad. I think there was a five-year low where people go “you don't want to go study abroad, you want to stay in China.” So you don't miss the phenomenal growth. But now with China struggling a little bit last few years, a lot more people are again rethinking, “I need to go abroad.” It's a great backup plan and it may actually be the best primary plan for anyone who's a top student right now. And so that is fueling a lot of demand right now. And is the only game in town right now in that space.
#china #education #stocks
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