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There is a bubble in China education stocks

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October 21, 2010 – Comments (2) | RELATED TICKERS: EDU , APOL

Four Chinese education companies will IPO this year and industry leader New Oriental is trading for more than 7x sales and 30x EBITDA. This space is starting to look bubblicious, and investors will get hurt. Read more in this week's Global View:

What sector of stocks has been among the worst-performing in the U.S. stock market this year? Consider the case of for-profit educators. Because of concerns about the quality of their product, heightened government regulation, and potential enrollment declines, Apollo Group (Nasdaq: APOL), ITT Educational Services (NYSE: ESI), and DeVry (NYSE: DV) are all off well more than 20%. Further, high-profile short-sellers such as Jim Chanos and Steve Eisman remain bearish on these stocks.

That performance and sentiment, however, differ enormously from how investors are treating for-profit education on the other side of the world. Three Chinese for-profit educators have IPO'd since August, raising some $300 million, and that country's private education leader, New Oriental Education & Technology (NYSE: EDU), is up more than 20%.

Are the dynamics that govern this space so different in China that private educators there deserve such a rosier outlook? My expectation is no and that investors in Chinese for-profit education today are headed for disappointment.


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2 Comments – Post Your Own

#1) On October 29, 2010 at 6:22 PM, anuragupta (86.83) wrote:

"Consider the case of for-profit educators. Because of concerns about the quality of their product, heightened government regulation, and potential enrollment declines"

All these three issues - quality, regulation and enrollment declines - are just one issue rather than 3 independent issues. Enrollment is declining due to govt threatening to reduce student loan funding due to perceived poor quality of education. It has nothing to do with the demand for education in the US. The stock declines is reflecting this core issue rather than a demand issue.

 Are the dynamics that govern this space so different in China ...

Chinese for-proft educational institutions are market funded rather than dependent on student loans (unless I am grossly mistaken here).

 So while the Chinese educational stocks may be overvalued and may be facing increasing competition they are indeed different from corresponding American education space.

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#2) On October 31, 2010 at 6:10 PM, kayakmastr (97.41) wrote:

Is access to higher education controlled by the Government in China?  If so, there should be a demand for private education by those excluded, which is not so much the case in the US. 

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