Research Shows New Oriental (EDU) Experiencing Declining Course ASPs Prior to 2014 by Ben Strubel
One of the big selling points used by New Oriental Education & Tech Grp (ADR) (NYSE:EDU) to attract investors is that the company has tremendous brand strength, particularly its POP Kids English programs, in China. The company claims this brand equity allows them to continually raise prices despite providing a commodity-type service in a highly competitive market. In our “on the ground” research, however, we have found the exact opposite. Our research appears to show that New Oriental is experiencing declining demand for classes and falling ASPs for its POP Kids English program over the past few years.
Before we explain what our research uncovered, let’s look at what the company is saying in its SEC filings and on investor conference calls. According to the company’s historic 20-F filings, New Oriental has seen its average selling price (ASP) for classes rise every year since it went public. Below is the chart showing implied ASPs each fiscal year for New Oriental.
As you can see, ASPs have risen steadily each year with an overall increase of 163% from FY2007 to FY2013.
On conference calls with investors, New Oriental’s executives confirm what the SEC filings say.
For example, on New Oriental Education & Tech Grp (ADR) (NYSE:EDU)’s 2013 Q1 conference call held on 29 October 2012 they say this:
Louis Hsieh (President & CFO): For this last quarter, let me see here, I believe pricing was up about; let me double kind of, it is about 13% to about $330 to $335. So I think the pricing, we will continue to take our pricing in overseas test prep in U Can and the big change will be probably to pick up pricing more on the kids side…
… So I think is that model needs to be where we will lose some enrollments on the kids’ side, but we’ll pick up a lot of margin points as we raise the price in the kids sector. We believe we have a better offering. So we should take up pricing.
Mr. Hsieh also confirms on the call that New Oriental Education & Tech Grp (ADR) (NYSE:EDU) has (note the past tense) raised prices in all cities, not just tier one cities like Beijing and Shanghai.
Ella Ji (Oppenheimer): And then, well you mentioned that you are going to move toward middle to high-end of the market. Is it only for Beijing and Shanghai or for other lower tier cities as well?
Louis Hsieh (President & CFO): I think it’s for all lower tier cities as well. I think Ella that the price increases last quarter on a year-over-year basis was about 16% to 17%. So we are already beginning to do it.
In an earlier conference call for the 2012 fiscal year end, management again said ASPs were rising.
Steve Zhang (Macquarie Funds Group): Okay. In terms of pricing power maybe I can get a little more granularity on this. Are you seeing less pricing power in some of the U-Can and POP Kids segments, (push) them into the macro environment?
Louis Hsieh (President & CFO): We have – we just really began to face this macro environment in the last three months. We are continuing to raise prices. Last year – last quarter our ASPs were up 14% on a blended basis. So, we haven’t really toned back the price measure. So we may do that if demand slacks off significantly. So we would – maybe look at that as a way to drive up more students. But as of now we’ve not really slow down our price increases.
Mark Marostica (Piper Jaffray): Yes, sorry. Thanks for taking my question. Just following up on the ASP theme. I’m curious Louis, what you’re seeing in terms of ASP increases in Tier-2 cities as opposed to Beijing and Shanghai?
Louis Hsieh (President & CFO): Well, Tier-2 cities pricing is actually quite healthy. So its just like Beijing and Shanghai were 10 years ago. So they’re quite healthy. But what they do is because when you blend it with Beijing and Shanghai, it looks like the pricing is going down. It is what I talked about it before, but it’s not.
Our research (links to the copies of all the class lists and pricing lists we obtained can be found at the end of the article) found something different though. We were also able to obtain historical course information for Hefei, Foshan, Changchun, Qingdao, and Chongqing area campuses. Comparing the historical course offerings and pricing to current course offerings and current course prices appear to show that not only is New Oriental unable to raise prices, but also they appear unable even to keep course pricing flat. Instead, the company appears to have had to slash course fees and cut course offerings.
We obtained course and pricing information for the 2011-2012 POP Kids “winter break” courses offered in the Hefei area from New Oriental’s POP Kids website. It appears that the website for the Hefei area, along with others (see our previous article on New Oriental’s out-of-date websites), has not been updated in over a year. We were also able to obtain course and pricing information for all POP Kids classes currently offered by New Oriental from their publicly available course lists.
We were then able to compare changes in course offerings and pricing from the past 2011-2012 winter break session and current 2012-2013 winter break session. In 2011-2012, POP Kids offered 43 courses in the Hefei area with an average price of RMB 681.45. Next year, in 2012-2013, the number of classes plummeted to just 27 with an average price of RMB 610.37.
We also obtained historical course offering and pricing information for the Foshan area schools for the winter and spring (autumn) courses.
We found that the number of course offerings in Foshan fell by 36% and the average pricing for a course dropped 48%.
Despite being a prefecture level city of 3.6 million people in the city proper and 7.1 million in the city’s administrative area, with a far above average per capita GDP of RMB 80,579, New Oriental Education & Tech Grp (ADR) (NYSE:EDU) appears unable to keep its learning centers full and appears to have been forced to lower course prices drastically.
We were able to obtain historical course offering data for the Changchun area but not any pricing data. Again, the evidence appears to be at odds with New Oriental’s claims in investor conference calls and the figures derived from its financial statements.
Over a three-year period, the number of courses that New Oriental’s POP Kid’s stores offered in the Changchun area dropped by 91%! For the winter/spring 2009-2010 year, there were 171 POP Kids courses offered in the Changchun area. In just two years, the number of courses dropped to 16. For New Oriental Education & Tech Grp (ADR) (NYSE:EDU), Changchun is appears to be essentially a ghost town. This is despite Changchun having a total population of 7.7M with 3.3M in the city proper. Per capita GDP is RMB 43,9361, 2.
New Oriental appears to have trouble maintaining demand for its POP Kids courses in a city that ranks in the top 10% of Chinese cities by GDP per capita.
We also decided to check New Oriental’s pricing power in cities where course offerings were growing (which implies strong enrollment trends). We did this to give New Oriental every benefit of the doubt when it comes to analyzing pricing trends. We found that even in markets where New Oriental’s POP Kids programs are experiencing growing enrollments and course offerings are growing, pricing still appears to be falling.
We were again able to obtain historical pricing and course offering data for the Qingdao area through the Qingdao POP Kids website, which as with most tier two city POP Kids websites appears not to have been updated in years.
New Oriental Education & Tech Grp (ADR) (NYSE:EDU)’s Qingdao area POP Kids schools, despite showing a 42% year-over-year increase in course offerings, appear to have suffered a 16% drop in average course fees. We found average course fees dropped from RMB 1057.78 to RMB 890.20.
Again, to give New Oriental the benefit of the doubt, we looked at another city, Xuzhou, which showed growing enrollments.
This is the first data we were able to find that showed a price increase. We found the number of courses offered increased 70%, implying strong demand, and pricing increased 2%. While pricing increased, it appears to be a far cry from what New Oriental says.
The data our research turned up is truly perplexing. It appears to directly contradict the implied ASP numbers from New Oriental’s SEC filing and the comments of management on company conference calls. It certainly raises some questions about just what is happening in New Oriental’s POP Kids program. Were things at New Oriental Education & Tech Grp (ADR) (NYSE:EDU) going as well as management claimed from 2010 to 2013?
Appendix A: Class List and Pricing Documents
POPKids complete 2012 class list
Hefei 2011 classes
Foshan 2011 winter vacation classes
Changchun winter math 2010 classes
Changchun winter vacation 2010 classes
Qingdao 2011 classes
Xuzhou class list (page 1)
Xuzhou class list (page 2)
 We computed the average price (in RMB) per hour of instruction in order to account for any differences in lesson times and course length and course mix. Foshan schools seem to have moved from offering courses that meet for a short time over many weeks to courses that meet for longer times over fewer weeks.