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.

Test preparation is also good. In the early days New Oriental specialized in TOEFL and GRE training. Now it’s expanding to SAT, ACT, the US college entrance test; and China Graduate Entrance Exam, which has been popular recently because it’s hard for college graduate to find good jobs in China nowadays.

So in other words, New Oriental is in the “bring hope” business for many young students and professionals in China, with its English and test preparation training. That’s the upside. What’s the downside then?

Those are things I did not like initially:

1) The company ownership and complicated organization. Michael Yu Minghong owns about 30% of the company, people who read his GRE book (like me) knows him, but he was unknown to Wallstreet. How is his management skill? Also, a control shareholder being the CEO has its downside: I was burned by NINE (Ninetowns), in which its CEO and his wife has 70% stake, the stock has down almost 2/3 since its IPO. The reason: the founder (CEO) sometimes does not think from small shareholder’s (you and me) interest.

2) Competition: from my limited research, it seems the market EDU is trying to expand is very competitive. For instance, I heard there are many “kids English” program in the market, even in 2nd tier like Nan’chang. Also, I saw many English training providers in Shanghai last March/April. The barrier of entry is not high.

Back to the market, my concern seems a bit overworried, at least from EDU’s three quarters’ reports. Michael is being accepted by the Wallstreet as time goes; the competition is there, but EDU is incredibally focused. Unlike “English First”, it did not spend money on “2008 Olympics Sponsorship”, and giving out “fliers” on the street. It’s still using its founders’ (Yu Minghong, Xu Xiaoping etc.) chrisma for marketing purpose (low cost). It also has some new initiative such as partnership with foreign publishing house, and web learning.

I still don’t have plan to buy EDU stocks, but I do think it’s a stock worth to take a look.

Why I think MR is better than HMIN?

HMIN looked cheap these days, should we jump in and buy it? I have both MR and HMIN, and as a matter of fact, I bought some more HMIN after its disappointing earning report. My mistake. You may think because HMIN has been to $49, and now it's trading $29.50, isn't a big discount? Yes or No. I hope HMIN won't go much lower because it is my largest holding now (I'm looking for opportunities to exit).

I based "buy or sell" decision solely on fundamentals. The problem with HMIN is its fundamental is not getting better. As I said in my previous post, cost went up, room rate is flat, and occupancy rate went down because hotels opening in 2nd tier cities. Although the revenue grew 65%, the profit did not. Since stock is about future, we should ask quetion whether any of those are going to change? I doubt it. The real estate in 2nd tier cities are going up, so as the labor cost, on the other hand, you can not charge customer more because they will go to competitors.

On the other hand, MR grew revenue about 35%, but its profit and earning grew much more. This means their profit margin improved, a very good thing. Looking forward, the China domestic market should stablize after last year's "crack down" policy, because the hospitals will purchase or lease the medical devices every year; the US market is taking off. They also are expanding in R&D which will help the future growth.

Note HMIN and MR are trading at PE of 184 and 52, respectively.

Global Equity Shortage I: US market

First heard this "equity shortage" term from Jim Cramer, the host of CNBC "Mad Money". I watched his show mostly for entertainment purpose, but I think this term desribes the "supply and demand" of global stock market well. Yesterday the S&P index in the US hit a new high at 1530. Last record was set in dot com era on March 24, 2000. To put it in perspective, on March 20 same year, I got my job offer from my current employer.

There are many changes in the stock market during the past seven years. We have been through a recession, housing boom and bust, China boom, outsourcing boom, etc. For me personally, I became an investor in US stocks and mutual fund (401K); I also bought my first house. The business has done better fundamentally, many lowering cost by outsourcing and expanding in global market. Most the Internet concept-only companies have gone, the companies cleaned up their books after the Enron and WorldCom scandle, and we got Sabane-Oxly (which means more opportunites for my accounting friends).

But I think the "reducing stocks supply" also helped driving up stock prices. We all know the "supply and demand" determine the prices of goods and services in market economy. Similar things can be said for stock markets. We have declining stock supplies; and we got more money (although we consistenely complain we don't have enough). Let me elaborate more on the supply side: IPOs, buy backs, private equity, M&A.

1) IPOs: we did not have much IPOs from 2001 to 2003. We got more IPOs recently, but not many real good quality large-size IPOs. Google (2004) is a good one. Master Card (2006) is also good. Two large Chinese banks, ICBC and BOC went public last year, but I don't think they are in the Google/Master Card league. Note the Chinese companies listed in NASDAQ are fairly small companies.

2) Buy backs: a company can reward its investors in two ways: issue dividend; buy back outstanding stocks. The latter usually works better because dividend is taxed twice. Oil companies did a lot buy backs lately because they have lots of cash, and their need for capital expenditure is not too much. Some tech companies such as Microsoft and Cisco are doing the same.

3) Private equity: the latest is Cerberus took Chrysler private. This is not the largest deal in recent years. Blackstone's $20 b buy out of Equity Office is much bigger. In tech arena Sungard Data Systems $11.3 b buy out is quite big.

4) M&A: this does not necessrily reduce the stocks. If company A bought company B using cash, that will reduce stocks (e.g., eBay $620 m buy out of shopping.com). Oracle did lots of acquisition in recent years: Siebel, Peoplesoft, Agile, etc. Sometimes it uses its own stocks (it won't reduce the outstanding shares if it issues new stocks), sometimes it uses cash (that will do the trick).

So what's the big picture here? Not many good IPOs; reducing the stock supply by private equity and buy back; and increasing M&A activies (some overlap with private equity). No wonder there are fewer stocks for average Joe and Jane.

How to Measure Performance of Investing ?

We often heard story like that someone made $5,000 in stocks in one month. Cool. But that does not tell the whole story. Why?

There are a few questions I like to ask:

1) How much did he/she make the month before and after (that particular month)? In investing we typically measure performance by year, at least by quarter or 6 months.

2) More importantly, how much money did he/she started with? Is it $5,000 or $100,000. The return will be 100% or 5%, respectively. Big difference.

3) How much did the index do? Has S&P, Dow, or Nasdaq or other meaningful banchmark been up 1%, 5% or 10%?

4) Last but not least, a question new investors often ignore (at least I did), is how much risk did he/she took? I mean, was he/she trading big names MSFT, GE, or little known speculative stocks? Did he/she lose sleep because of holding risky stocks?