3 China Online Education Stocks to Watch

NEW YORK (TheStreet) --- Chinacast Education (CAST), China Education Alliance (CEU) and ChinaEdu (CEDU) are three Chinese companies in the education sector, which have been growing at a rapid pace and are trading at cheap 12-month earnings multiple. Moreover, the macro picture looks bright with government expenditure toward the sector targeted to increase by 4% of GDP by the end of the year compared to 2.7% in 2005.

Strong support from the government coupled with increasing globalization has led to rapid and consistent growth in China's education sector. The government has opened up the sector to private players and is providing substantial support to improve the quality of non-public funded education.

Going forward, another factor that could play a decisive role is the excessive use of the internet and advances in internet and computer-related technologies, such as video conferencing. The online education segment grew at 20.7% between 2006 and 2007 from RMB14.5 billion to RMB17.5 billion. China had about 12.2 million people using online education in 2007, 25.1% higher than in 2006 as per Market Avenue report. The total number of internet users in the country stood at 400 million at the end of 2009, more than the entire U.S. population.

Chinacast Education is a leading for-profit, post-secondary, and e-learning services provider. During the second quarter ended June 2010, the company's earnings increased 26% year-over-year to 10 cents per share on a revenue growth of 46%.

Into the third quarter, the company proposes additional investments to further strengthen and extend market opportunities such as the summer and international education programs on campuses, and the acquisition of its third accredited university, Hubei Industrial University Business College. For this acquisition, the company intends to deploy $66 million of capital from $157 million of cash and bank balance.

The stock is trading at an attractive forward PE of 11.05. On Aug. 24, Roth Capital Partners reiterated its buy rating on the stock with a price target of $12.

China Education Alliance, Inc. is an education service company that provides online education and on-site training in China. The company is engaged in the distribution of educational resources through the Internet.

During the second quarter ended June 2010, the company's net income jumped 30% year-over-year to $4.3 million on a revenue growth of 34%. As of June 30, 2010, the company had $75 million of cash and cash equivalents and no debt. Going forward, China Education Alliance is confident of achieving 30% revenue growth for the full year 2010, based on strong enrolment for its online educational services and vocational training services.

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