Sandalwood Research Blog
A preview of EDU’s Fiscal 4Q17 ending May 31, 2017
China’s New Oriental Education and Technology Group (or “New Oriental”, NYSE:EDU) is the largest provider of private educational services in China. Along with TAL Education Group (NYSE:XRS), New Oriental has lead the way in China’s fast-growing K-12 after-school tutoring services. China’s K-12 population is growing along with household spending on education, providing companies like New Oriental a prime environment for growth.
EDU is also one of the more popular Chinese stocks traded on the NYSE. Our research team tracks the company’s sales very closely on behalf of our clients, using offline spending data of consumers in China. We deliver monthly order intake numbers within a week after the end of the month, providing our clients a significant forward-looking view regarding the company’s revenue. This week we take a look at what our data is predicting for EDU’s quarter ending May 31, 2017, which the company is slated to report on July 18, 2017.
Using our Chinese consumer spending data, we attempt to predict EDU’s future performance by providing investors with a view of the company’s actual sales to consumers. Tracking sales of a company’s goods or services directly to consumers is what Sandalwood Advisors does best – we provide investors with a future view of sales, often well ahead of the company’s own guidance. For many companies that we track, what we report in terms of sales trends is very close to what company reports a month or more later.
However, it’s important to note that for some companies, actual sales during a particular quarter is not always what the company reports as revenue. EDU is one of these companies, which requires us to do a bit more work to predict its future performance. EDU doesn’t record sales as revenue until the student actually takes the class. This means what ends up recognized as revenue is only sales that correspond to classes taken in the current quarter.
Sales for classes paid for in advance are recorded as deferred revenue until the student takes the class. Therefore what the company actually recognizes as revenue is a combination of classes paid for in advance but taken in the current quarter, plus classes paid for and taken in the same quarter. In order to adjust for this distinction, we compare what we track in actual sales, or “order intake”, to what the company reports as revenue + change in the deferred revenue balance. We call this order intake.
*Order intake = Recognized revenue + Change in deferred revenue balance
Strong order intake has positive implications for the quarter, as it either means the company will recognize more revenue, or increase its deferred revenue balance. In this case, our data shows that EDU will report a meaningful positive comp in terms of order intake for the quarter ending May 31, 2017.
However, this isn’t the full story. Since we have data on a monthly basis, we can track order intake on a monthly basis as well. And what we’re seeing in order intake is worth highlighting:
Our data shows very strong order intake for April 2017. This means the company booked a huge amount of classes in April, likely to be taken during the summer season. However, it also appears that the company pulled some sales forward to April from May, resulting in a flat y/y comparison for May order intake. It will be very interesting to see what the company’s order intake is for June.
We will release our numbers for EDU’s June order intake to clients by July 7th. To be the first on the street to see the June figures, or our coverage of other stocks in the China education sector, please contact us here.