ChinaCast Education: Expanding the Campus

BEIJING (TheStreet) -- ChinaCast Education(CAST) is profiting from strong demand for higher education in the world's most populous country.

ChinaCast was the first and is currently the only education company owning Chinese universities to be listed on a U.S. exchange.

The company's shares currently trade at an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of about 5, which is a significant discount to its Chinese education peers, which trade at ratios of 10 to 12.

I recently interviewed Michael Santos, ChinaCast's president-international, about the company's prospects.

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Buckley: Can you give me some background about the company?

Santos: We are the largest U.S. publicly listed, PRC [People's Republic of China] for-profit, post-secondary education company. We have approximately 30,000 on-campus students at our universities located in Chongqing, Guilin, and Wuhan, and 141,000 e-learning students in partnership with 15 state-owned universities.

China is now the largest post-secondary education market in the world with 22 million students and is growing at a much faster rate than the U.S. But still only 5% of the Chinese population has a four-year university degree vs. over 25% in the U.S. and most western countries.

By 2020, the Chinese government has announced that it is targeting to have over 40 million university students and thus has opened the sector to private universities and e-learning to assist in addressing this ambitious growth target. Thus, we believe that our business is a good, visible, long-term growth story to track the rise of consumer spending power in China.

ChinaCast actually started as a VC-funded dot-com company back in 2000 to provide broadband Internet services in China using satellite technology from Hughes Network Systems [a unit of Hughes(HUGH)]. We were able to secure a nationwide satellite and Internet license from the Ministry of Information Industry [the FCC of China], raised $17 million in venture capital from Hughes, Intel Capital and Sunevision (Hong Kong) in October 2000 and went into the business of providing broadband Internet services to corporate and government customers. As a dot-com start-up, we needed to focus on getting profitable before we ran out of venture capital, so we decided to focus on the e-learning segment since our broadband satellite technology gave us an advantage over the government-owned fixed line telecom carriers.

At that time, our PRC university customers told us that there were over 100 million students that wanted to go to college but that there were only about 5 million physical seats in the PRC universities, which presented a great growth opportunity. Thus, the Ministry of Education granted these state universities distance learning licenses to recruit students off-campus for the first time to address the supply-demand imbalance, and the universities turned to us to provide the hardware, software and telecommunications services to allow them to connect all their remote distance-learning centers around the country back to their main campuses located in the major cities. We developed a business model where our company would invest in the equipment and software and would get paid by the university by taking a revenue share of each student's tuition, a win-win situation for both the university and our company.