Rosetta Stone, learning foreign language

First saw Rosetta Stone at the mall couple years ago (the kiosk). More recently saw its Ads on the TV. Today comes a monumental day for the company (bloomberg news, IPOHome, Yahoo Finance), the IPO (as old Warren says IPO stands for its probably overpriced).

Fun and emotion aside, I think this language thing may stick. Before Rosetta Stone, the other public company does language training I know of is New Oriental (NYSE: EDU). New Oriental has harnessed the Chinese market in a very unique way, and it’s now the un-disputed leader in English test training in China. The main reason? Basically without the training from New Oriental, normal Chinese students can not score high in the TOEFL and GRE (notice I said normal, certainly I understand there are some exceptional Chinese students, and I happened to meet a few back in college). At the time I took TOEFL and GRE, New Oriental school has not existed in my city, so I took training from the best alternative: Qianjing college. Anyway, they serve similar purposes.

I have not used Rosetta Stone service yet. Nor do I plan to learn another foreign language (English is hard enough for me). But I know there is huge demand in this area. Chinese (mandarin) and Spanish are two popular ones. As matter of fact, my wife has been teaching madarin to some college students and little kids, and she has been enthusiatically studying Spanish and Cantonese these days. I joked with her why not learn Cantonese while at Hongkong (she studied there for one year).

New Oriental EDU buy back

A short while ago I decided not to short EDU. Today the EDU stock buy back program confirmed my reasoning. Here is their buy back plan (CNNMoney): New Oriental Education & Technology Group Inc. (NYSE:EDU) Thursday said its board had approved the buyback of 1 million American Depositary shares. The program is effective between Feb. 25 and Dec. 31, 2008.

According to Yahoo Finance, EDU has 37.54 million shares outstanding, and 3.55 million shares float. I verified it: those are ADR shares (note one ADR is equal to 4 ordinary shares for EDU).

No I haven’t got the stock buyback information from CEO Michael Yu in advance.

I remember in last conference call CFO Louis Hsieh said they would buy back stocks when they can not find other compelling opportunities (a.k.a, acquisition targets). It appears the competition landscape of China private education has been intensified in last few years.

Secular growth, Mindray, New Oriental

I was looking for a secular growth stock in China. By secular growth I mean the business grows continously without the normal business cycle. One benifit of secular growth is it usually does not go up or down a lot as economy cycle does. A side benifit of this is we (investors) can sleep better in the night 🙂

The opposite of “secular” is “cyclical”. For example, we normal think the following industries are “cyclical”:

1) Oil, metals and other commodities;

2) Real estate (we have seen the downturn in the US housing market lately);

New Oriental class break

Found the following video clip at Tudou, the China’s very own YouTube. The content pushed the envelop a little so don’t play it before your boss, coworker or kids. I haven’t verified whether this is indeed from a class break of New Oriental.

This (in a very small way) reflects the entertainment of China generation Y (young people born after 1980, or 80后).

Do you want to be a CEO ?

I got to see Michael on CCTV Channel 2 yesterday. He was participating a show as a guest. The show is about the “entrepreneurs born after 1980s” (Michael was born in 1960s).

I noticed he said something interesting about New Oriental “listed in NYSE”: if I could regret, I wish we haven’t done that. On the surface it seems strange, who does not want to get rich? But I think he meant this: being listed in NYSE is a huge responsibility, if he had known all the pitfalls of “listing in the US” (not just Sabane-Oxly), he would re-consider.

But in reality he couldn’t. Because he is not the sole owner of the company. Both VC (refer to Shao’s blog about VC’s timeline) and his colleagues (many are minority stock holders) wanted to cash out. The company could use the IPO proceeds to expand; note the competition has also heated up too. The “listed in NYSE” will also help them build the brand, globally.

Back to Michael’s reponsibility. As soon as he took money from the Wall Street, he was expected to deliver the financial results to meet the street. He and his team did very well in first two Qs, but they missed the lastest Q. I bet he did not get much good sleep lately, because he needs to make sure next Q will come out OK.

EDU: missed 5 cents

in its fiscal Q4 2007 earning. The analysts were expecting 1 cent, while EDU reports loss of 4 cents. Ouch, that’s even worse than last week’s Google’s miss (3 cents).

Seriously, I don’t think missing a few pennies is not big deal for long term investors. But the reason behind the miss is more important. In EDU’s case, on the surface it’s the seasonality: the late arrival of Chinese New Year this time push sales from fiscal Q4 to Q3.

I did listen to its conference call (7 AM!), here are a few highlights:

1) The English training still is the main revenue source and growth driver, that includes: oversea test preparation (students enrollment increased from 35,000 in fiscal 2006 to 58,000 in 2007) ; kids English; middle school students English.

2) New growth area: other subjects (math, physics, chemstry etc.) for middle school students; pre-school kids education (not limit to English).

3) Tier one, tier two: plan to add more learning centers in tier one cities (Beijing, Shanghai), note Shanghai is the fastest growth city; it won’t open many schools in tier 2 cities (mostly kids English) where it did not get good name recognition (this strategy is opposite to Home Inns’).

The stock got punished today as people were expecting a block buster number. I don’t bet on earnings these days, nor will I try to catch the falling knife here. I think a 30% growth is good if they can sustain the growth for a while, but the street obviously expects more.

New Oriental Education EDU ?

I received an email from a friend asking me whether New Oriental Eudcation (EDU) will be a good investment or not. I was not warm to it initially, changed my mind and bought it in Jan., sold it in Feb., because I did not know how to evaluate it.  

First I want to say EDU is in a very sweet spot in Chinese private education market: English and test preparation. A little background, English is a very important skill in finding good jobs in China these days: from multinational companies to domestic companies, from private sector to goverment, and non-for-profit, all because the increasing interactions between China and the west in last 20 years.

Is English First Co. a Threat to New Oriental?

I noticed this “English First Co.”, which is 2008 Beijing Olympics language training partner, because of their ubiquious ads (outside and inside) Cloud 9 building. I understand there are at least 2 levels of Olympics partners. Lenovo, Haier and Coke Cola, etc are exclusive sponsors (in its product category). In other words, they gave more money to Olympics committe and they got more exposure in return. MengNiu (diary product), “English First” and others are product providers. As the name implies, they gave products to Beijing Olympics. But still, I was puzzled why New Oriental did not go for it? I can think of two reasons: 

 

It's OK to Leave Some Money On the Table

I am not talking about the tips in the restaurants; I am talking about the stocks going up after we sell them, doesn’t that happen all the time? Just like it goes down after we bought it? My most recent example is New Oriental (EDU, it seems to me the traders did not take too much time off for the Lunar New Year). And it happened to my friends in China too. The friend was very upset when he told me the story. It seems to us sometimes “not making all the money” feels worse than “losing money”. For instance, if a stock falls after we bought it and we sold it because it never went back the level is was, i.e., we were “under water” the whole time, we may not feel that bad. But on the other hand, if it went up big and we missed the potential big profit, we will feel mad at us 🙂

New Oriental EDU Seconday Offering

The following is from Reuters. I have not seen the final prospectus from SEC web site yet. 

“HONG KONG, Feb 9 (Reuters) – Investors and New Oriental Education & Technology Group Inc. (EDU.N: Quote, Profile , Research), China’s largest education group, and its investors have raised US$334 million after pricing 8.05 million American Depositary Shares at a 1.78 percent discount to its last closing price.

Investors including Tiger Global and the founder of New Oriental sold the shares at US$41.5 apiece.

The shares sold comprised 92 percent of existing shares and 8 percent of new shares, the source said.”

(Update 09Feb07) The prospectus is here. If you look carefully at the “selling shareholders” section, you will find “Tigerstep Developments Limited, a company incorporated in British Virgin Islands, is wholly owned by Bamei Li, mother of Michael Minhong Yu”. Yu’s mom is probablly the richest grandma in China 🙂