Education in China Investment Opportunities

CIBT Education Group - Cashing In On Overseas Chinese Students




Since I wrote my article "Chinese Take-Away Becoming Tempting Again" my contention that "Chinaco" - Chinese companies listed in North America - were oversold has been confirmed. The NASDAQ Golden Dragon China Index (representing about 60 companies headquartered or incorporated in China and trading in the US) is up about 50%. Companies I mentioned have done well, with Perfect World (PWRD) the big win. CIBT Education Group (MBAIF.OB)(MBA.T) has started to move and could have much more upside.

Given the investment adage "buy what you know" I have a particular interest in the educational sector. In 2007 I spent a memorable fortnight quietly assessing New Oriental Education (EDU) locations throughout China. My client's own people had been wined and dined at the major centers but wanted to check on locations in the second and third tier cities. In Shanghai I taught at a private degree-granting institution (Raffles Education.) It has been well documented that after real estate, education is the biggest single expense for Chinese parents and grandparents, all dedicated to giving their child the best chance to compete in an increasingly crowded pool of trained workers.

An admittedly unscientific portfolio of 9 companies that fall into the "Chinaco" category has improved by over 40% since April. While EDU is the big fish in the pond, ATA Inc. (ADR), Noah Education (NED), ChinaEdu Corp. (CEDU) China Distance Education (DL), TAL Education (XRS), and Xueda Education have all fared well. The returns of this portfolio would be better if it weren't for Ambow Education (AMBO) and Chinacast Education (CAST). Due diligence remains crucial.

So investors have plenty of choice in education companies operating in China. CIBT offers exposure to another stream of revenue from the ever-increasing number of Chinese students learning abroad. While US Universities have recruited Chinese students for years, the trend now is for younger students to travel for education. According to the China Daily (August 2, 2013), 22.6% of Chinese overseas students are studying at the high school level or below. (Read the article here.)These students and schools rely on trusted agents for placement. CIBT is ideally positioned to fill this niche, by expanding its role as an education "super-agent".

CIBT has been an education holding company largely ignored by investors. Despite steady improvement in revenues, profits remained elusive. Even the purchase and cancellation of 6 million shares (8% of the outstanding shares) under a normal course issuer bid on the TSX had little effect on the stock price.

There are solid fundamentals to back this company's plans. Since 1994, CIBT has operated online courses and 'bricks and mortar' schools in China through subsidiary CIBT School of Business and Technology Corp ("CIBT China"). In 2007, it acquired Sprott Shaw College, an established community college that caters mainly to domestic students. In 2010, it acquired KGIC Education Group, one of the largest private English Language training schools in Canada. Annual group revenues increased dramatically after the acquisitions leveling off just below $60 million in the past few years.

CAN$ Millions (except per share amounts) 2012 2011 2010 2009
Revenue 58.0 58.6 56.0 44.6
Cost of Revenue, Total 27.2 27.6 20.7 16.2
Gross Profit 30.8 31.0 35.3 28.3
SGA Expenses 29.8 32.9 32.1 25.9
Research & Development 0.1 0.2 0.0 -
Depreciation/Amortization 1.6 1.7 1.5 1.6
Unusual Expense (Income) 0.1 6.5 3.1 0.0
Operating Income -0.7 -10.3 -1.4 0.8
Diluted EPS -0.02 -0.15 0.01 0.00

While the company was operating just around break-even, its market capitalization did not reflect the value contained in the company, which has a footprint in China providing access to the world's largest education market, 'bricks and mortar' schools in Canada, and the opportunity for increased profit margins as it digests its acquisitions.

It looked like getting shareholder value would depend on either a takeover by a larger player in the Education Sector attracted by CIBT's 20+ locations and more than 11,000 students, or by a MBO driven by PE funding.

Note that in the balance sheet summary below, Current Liabilities are high because they include prepaid education services. The 2013 balance sheet will reflect the sale of the subsidiary discussed below plus the reduction in shares outstanding.

CAN$ Millions 2012 2011 2010 2009
Total Current Assets 18.1 16.6 24.5 22.0
Total Assets 44.8 42.1 55.0 47.5
Total Current Liabilities 24.9 21.4 26.4 21.6
Total Debt 2.3 2.5 3.1 0.6
Total Liabilities 28.9 24.9 28.0 24.9
Total Equity 15.8 17.2 27.0 22.7
Common Shares Outstanding 68.1 69.5 69.2 64.1

With the events of the past month, though, CIBT CEO Toby Chu has taken a dramatic step that makes the company one to be watched in the education sector. On September 3, 2013, he sold the KGIC subsidiary: After paying $4.5 million in 2010 it was sold for $13.5 million - all cash. This return (estimated at $0.14 per share) attests to both the operational acumen of the CIBT group and its ability to recruit international students (in the three years they owned KGIC, CIBT grew KGIC's $16 million in revenue and 5,000 students to $25 million and 8,000 students).

In early 2013, the company commenced using its own recruitment channels to place students with partner schools in the US and Canada. The premise is simple - students (and more importantly, the parents) need a good fit for the education experience. Schools need to be confident that the student's skills are appropriate. This division is already flourishing. Revenues (in the form of commissions paid by schools) are ongoing and carry substantial margins (over 70%.) Although year end results are not available until November, this division could replace the EBITDA from KGIC in short order. EBITDA for the 9 months ended May 31, 2013 from CIBT China has increased by $414k, mainly due to agency fees, compared with EBITDA from KGIC of $369k in the same period. Revenues continue for the length of a student's enrolment at a partner school.

In the longer term, the company will capitalize on its operating prowess by acquiring additional undervalued schools (presumably to sell them after increasing enrollment by using its existing channels throughout China). It also has commenced developing a pair of educational "super-centers" in the Greater Vancouver area with estimated project size of $350 million. These super-centers will aggregate a number of language schools, career colleges and universities at a centralized location attached with a student hotel that can house the large influx of international students arriving Vancouver annually.

There are risks involved as CIBT rolls out its new look. There are few barriers to entry in the educational agent field, although CIBT can reply on its almost 20 years of experience in the marketplace and its established 'bricks and mortar' presence to counter the unaffiliated agents. Educational recruitment in Asia is mainly handled by individual education agents allied with a few schools. The quality of the services is (to be polite) mixed. Partner schools could retain their own agents. There may be no suitable schools to acquire. And their super-centers are a few years away from fruition.

Bottom line: a company in a hot sector, with a full treasury and significant assets, management focused on building both short and long term value to shareholders. Their Annual Results are due November 30th……….and the numbers should start attracting some serious attention.