The first Chinese education company to list on the New York Stock Exchange, New Oriental raised $112.5 million after pricing its 7.5 million American depositary shares at $15 apiece û well above the $11 to $13 indicated price range.
The high price, which valued the company at an adjusted 2007 PE of 22.1 times, was possible after the order book was more than 35 times covered even though bookrunners Credit Suisse and Goldman Sachs capped individual orders at 10% of the total offer three days into the 2.5 week roadshow.
According to people familiar with the deal, there was no price sensitivity in the book at all and even when advised that the price would be fixed above the marketing range nobody withdrew their orders or attached a limit. Observers credited a large part of the success to the company management, which was said to have done a very good job during the road show.
ôBeing an English teacher, he certainly knew how to get his point across,ö one observer says of the companyÆs founder and CEO, Michael Yu.
Further evidence of that was the hit rate of about 90% from the more than 450 one-on-one meetings that were held in the US, Europe and Asia during the roadshow. More than 50% of the allocations were expected to have gone to the US, with about one third ending up in Asia and the rest in Europe.
The company, which marketed itself as the largest provider of private educational services in China with more than 872,000 student enrollments in the fiscal year to May 2006, offers a wide range of programmes primarily focused on English and other foreign languages. Its products include language training, test preparation courses for major domestic and overseas admissions, primary and secondary school education as well as online education programs.
New OrientalÆs strengths are built around its well-known brand name û several investors who bought into the deal were said to have participated in courses provided by the company in the past û which it is now leveraging outside of its main business areas in Beijing, Shanghai, Guangzhou and Wuhan.
While those four cities accounted for about two thirds of its revenues in the most recent fiscal year to May 2006, the expansion opportunities are seen good given the fragmented nature of the market. With the 2008 Olympics on the horizon, the whole market is also expected to grow in the next two years.
The English training market in China, which amounted to about $1.9 billion in 2004, is expected to double to $3.7 billion by 2010 û a compound annual growth rate of 12.3%, according to a report published by a third party consulting and research firm.
New OrientalÆs net revenues have increased at a CAGR of 32% between fiscal 2004 and 2006 to Rmb770.3 million ($96.1 million) in the year to May 2006. Net income fell to Rmb49.4 million ($6.2 million) in FY06 from Rmb142 million a year earlier, mainly due to share-based compensation expenses incurred during the year.
The companyÆs simple business model, which sees it taking tuition fees at the beginning of each semester or course, also provides a lot of earnings visibility and makes it easy to value.
The final price valued New Oriental at a premium to South Korean education provider Megastudies, which was quoted at a 2007 PE of 17 times at the time of pricing, but at a discount to Singapore-based RafflesÆ Education, which fetched 23.7 times. (New OrientalÆs earnings were adjusted from the June to May fiscal year to a calendar year to make its valuations easier to compare.)
However, neither of those were seen as direct comparables, according to observers, given their different scale and growth rates, and in any case all valuations went out the window after New Oriental surged 39% to a close of $20.88 on its first day of trading last Thursday. At one point in the early morning the stock was up a hefty 55% before some investors were tempted into securing their profits.
On Friday the share price added another 5.4% to $22, including a 1.6% gain in after-hours trading.
ôPeople werenÆt focusing too much on valuations, the story here was the chance to own the first China education concept company,ö notes one observer.