4 China Online Education Stocks With Upside

NEW YORK ( Karvy) -- ChinaCast Education ( CAST), New Oriental Education & Technology Group ( EDU), Global Education and Technology Group ( GEDU) and China Distance Education Holdings ( DL) have 20% to 63% upside from current levels based on analysts' consensus estimates of price targets.

In comparison, U.S. education stocks like Apollo Group ( APOL), Education Management ( EDMC), ITT Educational Services ( ESI) and Career Education Group ( CECO )are estimated to return between negative 5% and 19% over the next 12 months based on consensus estimates of analysts polled by Bloomberg.

Last week, China's Internet population touched an astronomical 457 million, according to China Internet Network Information Centre. From a population perspective, China's Web users currently account for nearly half of the total U.S. population. Online education in China will benefit from increasing Internet penetration. China's education companies registered an average top-line growth of 45% during the recent quarters, indicating strong demand for Web-based education.

Beijing's moves to increase spending on education as a percentage of gross domestic product to 4% from the current 2% would be positive for companies engaged in providing educational services.

These four stocks are trading at forward price-to-earnings ratios of 12 to 28, with 2011 net income growth rates estimated at around 15% to 30%.

The stocks are stacked in terms of percentage upside, great to greatest.

New Oriental Education & Technology Group is the largest provider of private educational services in China.

For the second quarter ended Nov. 30, 2010, total net revenue increased 56% from a year earlier to $96 million. Total enrollments rose 32.2% year over year to about 406,000 from about 307,000 during the same period a year earlier. The total number of schools and learning centers increased to 447 from 402 in the 2010 August quarter. New Oriental built a net 24 schools and learning centers in the November quarter. In addition, the company acquired Newave Education, which has one school and 20 learning centers.

Net income increased 66% year over year to $1.8 million in the November quarter of 2010. Management expects total net revenue to grow in the range of 31% to 36% year over year in the third quarter of fiscal 2011. The stock delivered gains of over 30% to investors during the last one year.

China Distance Education Holdings is a provider of online education in China focusing on offering a range of professional education and test preparation courses and related services.

During the fourth quarter, the company posted net revenue growth of 11.6% year over year with total course enrollments at 400,000, increasing around 8% from the fourth quarter of 2009.

Reviewing the results, Zhengdong Zhu, China Distance Education Holdings' chairman and CEO, said, "Top-line for the quarter exceeded our guidance, despite having ceased offering ITAT contest related training and recording minimal revenue from Yucai this quarter. Our results were supported by steady enrollment increases across our course offerings with strong growth from our accounting continuous education courses, where enrollments increased 70% year-over-year. Our top-line was further supported by a material contribution from the sale of books and reference materials. "

Gross profit margin was 55.6%, compared to 60.6% during the fourth quarter of fiscal 2009. The stock delivered gains of 22% during the last one month and is trading at 19.6 times its estimated 2011 earnings.

Global Education and Technology Group is a China-based provider of educational courses and related services focusing on foreign language training and test preparation. The company provides test preparation services for the International English Language Testing System.

The overall expansion of the learning center network is a key long-term growth driver. The company opened its first learning center in Beijing during 2001.The learning center network includes 66 directly operated and 226 franchised centers as of June 2010. The company also has 144 Global Kids English learning centers.

Net revenue and net income grew at around 60% during the last three years. The company has managed to drive revenue growth at around 65% year over year during the first six months of 2010; however, net income declined 25% in the same period.

The company has 1 million registered members for its online learning Web sites. The learning programs include online language training and professional certification test preparation courses. The stock is trading at 15.4 times its 2011 estimated earnings, a discount to its peers.

ChinaCast Education is a China-based post-secondary and e-learning services provider.

Net revenue for the three-month and nine-month periods ended in September 2010 amounted to $18.7 million and $51.4 million, increasing 52% and 47% over revenue of the corresponding periods in 2009, respectively. The increase is attributable to the consolidation of revenue following the acquisition of East Achieve and Wintown in 2010.

Gross profit margin stood at 49% and 52%, respectively for the three months and nine months ended September 2010, respectively. Net income grew 59% during the 2010 third quarter.

On student enrollments, Ron Chan, chairman and CEO, said in a press statement, "During the third quarter we completed the purchase of Hubei Industrial University Business College, which expands our on-campus enrollments by approximately 10,000 students. We are now providing accredited degree programs to approximately 32,700 traditional university students and 143,000 e-learning students throughout China."

Management's guidance for the year-over-year revenue growth rate is 53% to 57% for 2010, while net income could grow at 34% to 44% for the same period. The stock is trading at 12 times its estimated 2011 earnings.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

More from Technology

Worth a Stunning $6.6 Trillion, Tech Stocks Have Taken Over the Market

Worth a Stunning $6.6 Trillion, Tech Stocks Have Taken Over the Market

Here's Why Snap Shares Climbed Monday

Here's Why Snap Shares Climbed Monday

Dropbox Soars in Third-Straight Record-Setting Session

Dropbox Soars in Third-Straight Record-Setting Session

Bitcoin Today: Prices Close to Flat in Low-Volume Trading

Bitcoin Today: Prices Close to Flat in Low-Volume Trading

Tesla's Elon Musk Just Told Short-Sellers They're Toast

Tesla's Elon Musk Just Told Short-Sellers They're Toast