New Oriental Eyes Chip Design, China Liberal Chases Higher Education

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We will start the week with a few articles from the education sector, which is in a difficult situation, which these days is mostly silent after the mass cleaning, as a result of which many lost the lion’s share of their income. This has left most companies trying to figure out how to move forward over the past few months. Many smaller names seem to be completely shut down, while larger ones with larger resources are trying to cut back by focusing on areas where they are still allowed to do business.

On this front, a new report shows a veteran of the industry New Oriental Education & Technology Group Inc. (EDU) (9901.HK) may be preparing to dive into semiconductors, which is now about as hot as education, in terms of investor interest. Meanwhile, much less China Liberal Education Holdings Ltd. (CLEU) has announced that it is close to concluding a deal to acquire two private universities.

To sum up, since last September, China’s private education sector has been essentially banned from offering post-school tutoring services in the main subjects of the program to most primary and secondary school students since last September, as part of a capital overhaul known locally as “double reduction ”. This has dealt a big blow to companies such as New Oriental, which have estimated that such courses for K-9 students have ranged from 50% to 60% of revenue over the past couple of years.

The actual primary and secondary school operators, for example, are now being privatized Education Hailan (HLG) have also suffered from new restrictions that limit their business. For comparison, the operators of private vocational schools and universities for adults are among the least affected, although this may change at any time.

Against this background, we will start with the latest move by New Oriental, which has not released any quarterly financial reports for almost a year, but is preparing to publish results for the six months to November last year on Tuesday after closing markets in Hong. Cong. Instead, it released a steady series of updates on cleaning up education, and last month said in a statement to the Hong Kong Stock Exchange that it expects to report losses of $ 800 million to $ 900 million in the six months to November last year, changing $ 228.6 million. profit for the year ago.

This warning should come as no surprise, as previous media reports said the company’s profits had fallen last year when it left the K-9 education business. They also said it had incurred a whopping 20 billion yuan ($ 3.16 billion) in costs related to the dismissal of 60,000 employees and the cancellation of many classrooms.

To put this in perspective, in its latest financial report a year ago, the company said that at the end of February 2021, it had about $ 6 billion in cash, time deposits and short-term investments. half of that cash on cleaning costs.

While all of this sounds pretty negative, we could also be more positive and note that New Oriental has yet to have a military chest of about $ 3 billion to try to invent itself. He considered a wide range of options, and previous media reports reported that since July last year about the creation of about 90 new companies, from sellers of stationery and agricultural products to software developers with artificial intelligence.

Chip designer?

This brings us to the latest news that the media says the company has just set up (source in Chinese) a manufacturer of semiconductor chips called Taiyuan Design Future Technology Co. Ltd. with reference to the national register of new companies. The company has a registered capital of RMB 1 million and will be engaged in the development, production and sales of semiconductor microchips, the statement said.

While this particular move may seem strange to Westerners, it actually makes sense in China. The country is currently on a mission to build up its domestic chip industry, and over the past three years the need for this drive has grown following U.S. steps to abandon important related technologies from China’s chip sector.

Accordingly, huge sums of public money became available to anyone who at least a little confidence entered the space. In this case, the new company is located in the inner city of Taiyuan, the capital of the relatively backward province of Shanxi, which is better known for its coal mining than high technology. This means that local authorities may well subsidize this particular enterprise in the amount of tens or even hundreds of millions of dollars if New Oriental decides to move forward.

Of course, microchips are a different matter from education. But by creating a huge and very successful private education company before the clamp, New Oriental proved to be quite capable of building a new business. So we have to wait and see how seriously this potentially new direction is.

We conclude with news from China’s Liberal Education, which is a relative educational goliath with a market capitalization of just $ 12 million and an annual revenue of about $ 5 million. The company provides software and other services mainly to universities, which, as we mentioned above, have not been the focus of recent reforms.

Now the company seems ready to back up the business by acquiring a pair of private universities with 4,200 students for $ 60 million – five times the current market capitalization, according to an update released last week about the deal, first announced in early February. The deal is expected to close in May, which could dramatically increase the company’s revenue.

Current price-to-value ratios (P / B) may now be the best indicator to compare how investors see this group of companies, as profits and profits have become quite volatile in the current environment. New Oriental is currently trading at a low P / B of 0.5, which is roughly comparable to a similar veteran TAL Education (TAL). Chinese Liberal trades with a minimum P / B of just 0.27, while more technology-oriented Ghaot Tehedu (GOTU) is a relative favorite of investors with a P / B of almost 1.

Shares of China Liberal have risen 8% since it first announced its plan to buy two universities, and New Oriental has risen another 20% from a 10-year low in late January. Such signals may hint that spring may come about a quarter for this downtrodden sector, at least for companies with the best prospects for survival.

Disclosure: None

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Editor’s note: The summary for this article was chosen by the editors of Seeking Alpha.

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