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We have recently introduced New Oriental Education & Technology Group (EDU) to coverage by The Value Line Investment Survey. The company is the largest provider of private educational services in China. It offers a range of educational programs, services, and products consisting mostly of English and other foreign language training. It also provides test preparation courses for entrance exams used by educational institutions in the United States and several other countries, as well as primary and secondary school education.

The company was founded in 1993 and is based in Beijing. It develops most of its educational content, including books and software, and also offers online education. Its online network has over 4.5 million registered users. The educator offers its programs through 48 schools and 222 learning centers, with over 5,200 teachers in 42 cities.

New Oriental finished fiscal 2010 (ended May 31st) with strong results. It posted a sizable jump in revenues, thanks to a more than 30% increase in total student enrollment in language training and test preparation courses. The company continues to expand its network, adding learning centers to new cities in China. It is benefiting from favorable trends in the country, where the market for educational services has been exploding in recent years. Enrollment growth for kids/afterschool tutoring has been higher than anticipated, and we believe these favorable trends will continue.

China’s economy is expected to grow at a solid pace in the years to come, fueling stronger employment conditions and higher discretionary income. This scenario ought to help support strong demand for the company’s core offerings. China also has favorable demographic characteristics. Besides being the most populous country on earth, with over 1.3 billion individuals, it has a huge market of over 260 million people under the age of 19. This is clearly a major opportunity that New Oriental hopes to tap.

The company plans to continue to expand its network. Management hopes to open roughly 100 learning centers in the coming year to satisfy the strong demand it is seeing for many of its programs. Most of these will likely be opened in existing cities, although it expects to penetrate three or four new municipalities during the year. The company is also launching new Kids’ Math and Kids’ Chinese writing programs that will target 5- to 12-year old children, which will complement its existing Kids’ English courses.

As a result of its significant growth and expansion, the company is facing higher costs, including expenditures for building new education centers in existing and new markets. It will also likely see higher marketing expenses. New Oriental is expected to continue to spend heavily to promote its kids/after school tutoring, which is aimed at expanding market share and increasing enrollment. These additional costs will likely put some pressure on margins, although we still look for margin expansion over the next few years. In addition, the hearty sales and enrollment growth that we look for in the coming years ought to more than offset these concerns.

All told, we view New Oriental Education as a promising company with good earnings potential. The firm should benefit from China’s strengthening economy and increasing investment in education. The company’s test-prep business should remain the key driver of growth, as the number of students going overseas continues to rise rapidly. Although competition is increasing, New Oriental is expected to remain on top of the Chinese private education business for many years to come.