New Oriental Education & Technology Group Inc

New Oriental Education & Technology Group Inc. (NYSE: EDU) founded in 1993, is one of the leading educational service providers in China. EDU offers a diversified portfolio of educational programs, services, and products to students in different age groups, including K-12 after-school tutoring for major academic subjects, overseas and domestic test preparations, nonacademic languages, and services in vocational training.EDU has network of 1,416 learning centers, including 99 schools, 12 bookstores and over 38,400 highly qualified teachers in 86 cities.

Key highlights

• Tighter regulations to trim down prospects: As per recent news, China is framing tough new rules to clamp down on a booming private tutoring industry, aiming both to ease pressure on school children and boost the country's birth rate by lowering family living costs. The clampdown would also have the effect of cooling China's cutthroat tutoring market for kindergarten through to the 12th grade, or K-12 pupils. The draft rules are likely to be unveiled by end-June. Under the planned rules, on-campus academic tutoring classes would be banned, as will both on and off-campus tutoring during weekends. The planned rules would add to restrictions imposed in March, including a ban on live-streamed classes for minors after 9 p.m., a crackdown on advertising, and a ban on academic tutoring course offerings for pre-school kids. The new rules are likely to affect the prospects of the industry growth.

• Increased Students Enrollments: The company has registered increased student’s enrollments in academic subjects tutoring and test preparing courses. During Q3 2021, student’s enrollment surged by 43% to 2,296,800 from 1,606,100 in Q3 2020. Additionally, the EDU’s, K-12 all-subjects after-school tutoring business, U-Can middle and high school all-subjects business and POP Kids program recorded a year over year growth of approximately 37%, 35% and 40% respectively.

• Expanding Schools and E-learning Centers: The group has opened around 209 new schools and E-learning centers over a period of one year. As of February 28, 2021, the total number of schools and learning centers was 1,625 as compared to 1,416 as of February 29, 2020. Also, an increase of 107 as compared to 1,518 as on November 30, 2020. The total number of schools was 118 as on February 28, 2021 as compared to 99 on February 29, 2020.

• OMO Strategy: The company is leveraging its OMO (online merging offline) strategy to virtually reach a larger pool of students in various cities. This strategy helps in gaining promising number of new customers, accompanied by improved student retention with low customer acquisition cost. Additionally, OMO initiatives would help in capturing market share and would improve overall profitability.

• Healthy revenue outlook for Q4 2021: The company has provided strong guidance for the fourth quarter ending May 31, 2021, with revenue expected to be in the range of USD 1,101.9 million – USD 1,141.8 million, representing year-over-year growth in the range of 38% to 43%.

Financial overview of Q3 2021 (In thousands of USD)

Source: Company

• In Q3 2021, the company reported a healthy growth of 29.0% in its total revenue at USD 1,190.4 million, against USD 923.2 million in the previous corresponding period, primarily due to increase in student enrollments in K-12 after-school tutoring courses.
• Total operating expenses increased to USD 1,089.0 million compared to USD 805.9 million in pcp. Operating expenses increased mainly due to higher cogs, SGA and marketing expenses driven by increase in teachers’ compensation, addition of marketing staffs and increased headcount as the Company grew its network of schools and learning centers.
• The company clocked lower operating income at USD 101.4 million, against USD 117.2 million w.r.t pcp due to above stated reasons.
• Net Income for the reported period increased at USD 126.6 million compared to USD 117.2 million in the previous corresponding period.

Risks associated with investment

Any strict regulatory measures on online private tutoring and E-learning platform would hit the company’s revenue and margins.  Also, the acceptance of new educational programs, services and products offer by the company, decrease/delay in the student enrollments and course fees, amendments in PRC laws, regulations and policies relating to private education and providers of private educational services would dampen the company’s revenue and profitability.

Stock recommendation

The company has witnessed good top-line performance in Q3 2021 owing to increase revenue from educational programs and e-learning services, where K-12 tutoring business showed YoY growth of 37%, U-Can middle and high school tutoring business grew by approximately 35% and POP Kids program showed YoY growth of 40%. Also, company is focusing on curbing its acquisition cost by OMO (online merging offline) strategy. Moreover, company is heading towards its expansion plans by opening new schools and E-learning centers in various cities. Despite several upsides, EDU is facing regulatory challenge from the Chinese government, where China is imposing new restrictions on the tutorial and E-learning business, aiming to curb pressure on school children and boost the country’s birth rate by cutting down the living costs.  The new rules would restrict the fees charged by the tutoring companies. These new rules have potential to clamp down booming private tutoring industry and could be unveiled by the Ministry of Education by June 2021.  Following the uncertainties, the stock has corrected significantly in the recent past. On the valuation front, the stock is trading at a forward EV/Sales multiple of 2.3x compared to the Industry’s Median of 2.9x. Considering the uncertainties on account of regulatory changes, we prefer to remain on the sideline. Hence, we recommend a 'Watch' rating on the stock at the last closing price of USD 10.23 on May 31, 2021.

One-Year Technical Price Chart (as on May 31, 2021). Analysis by Kalkine Group

QuantumScape Corporation

QuantumScape Corporation (NYSE: QS), formerly Kensington Capital Acquisition Corp, is engaged in the development of solid-state lithium-metal batteries. The Company offers its batteries for use in electric vehicles. It designs its anode-less solid-state lithium-metal batteries using its original equipment manufacturer (OEM)-validated battery technology. The Company serves the automotive industry.

Key highlights:

• Decent Prospect: The Lithium-metal batteries have proven to be a major upgrade over existing batteries in the Electric Vehicle market. The group operates in a significantly large and growing market that offers immense room for growth.
• Strong Balance Sheet: The group has negligible balance sheet risk as it has zero debt in its books. Further, the company has significantly higher liquidity profile with Current Ratio of 72x.
• Volkswagen Milestone: At the end of the quarter, the group reported that it got a contractually committed milestone with Volkswagen, which resulted in an additional USD 100 million investment into QuantumScape in April.
• Bearish Technical Indicator: Technical indicators are showing a bearish trend in the stock, with stock trading below all the support levels of 5-day, 10-day, 20-day, 30-day, 50-day and 200-day SMAs, which is considered as a strong bearish trend. Further, the leading momentum indicator MACD is falling and hovering below the 9-day SMA signal line. However, 14-day RSI is hovering in steep oversold zone at 18.5, implies a potential pull-back could take place.

Financial Highlights: Q1FY21

Source: Company

• Net Loss expanded to USD 75 million as compared to USD 15 million in the same period of the previous financial year.
• The prime reason behind a widened net loss position is significantly higher R&D expenditure on a comparative period basis and also significant surge in the general administrative expenses.
• Loss from operation widened to USD 44.6 million from USD 15.9 million in the same quarter of the previous financial year.

Risk: The company is exposed to a variety of risks ranging from delay in orders, supply chain distortion because of resurgence in COVID-19 cases, slow delivery take off of the electric vehicle, change in the battery technology as lithium is rare earth minerals, and other.

Stock Recommendation:  Despite a crucial player in the EV market and fairly decent balance sheet, yet company has to come out with revenue, and narrow down losses. Further, a steep bearish technical signal is just not boosting investors’ confidence to create long position in the company at the current level. However, development within the company should be monitored prudently. Therefore, based on the above rationale, we recommend a “Watch” rating on the stock at the closing price of USD 25.89 on May 31, 2021.

1-Year Price Chart (as on May 31, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.