Global Economics

Chinese Online Education Provider Seeks U.S. IPO


This Chinese online educator has filed to get its upcoming IPO on the New York Stock Exchange in late July

China Distance Education Holdings (CDEL) will today start marketing in Hong Kong a U.S. initial public offering that aims to raise between $78.75 million and $96.25 million. The company is looking to list on the New York Stock Exchange in the week of July 28.

If successful, it will be only the third Chinese company to complete an IPO in the U.S. this year after fellow education play ATA and solar wafer manufacturer Renesola. However, it is likely to be followed before long by TV advertising agent China Mass Media International Advertising Corp, which filed for an IPO of up to $150 million last Friday.

Privately owned CDEL is the largest provider of online education and test preparation courses in China. It focuses primarily on professionals and the skills, licenses and certificates that they need to pursue a career in China within accounting, law, healthcare, construction engineering, and information technology, among other industries. The Beijing-based company also offers online preparation courses for higher education diplomas and degrees, and for academic and entrance exams at the secondary school and college level; and foreign language courses.

CDEL is offering 24.7% of its share capital in the form of 8.75 million new ADS, which each account for four common shares. The price range has been set at $9 to $11, which at the bottom of the range will give it a market capitalisation of $319 million at the time of listing. A 15% greenshoe may lift the maximum proceeds from $96.25 million to $110 million.

The money will be used for working capital and capital expenditure related to the expansion of the business and potential acquisitions. However, part of the reason for the listing??hich may explain why it chooses to list now, when the U.S. equity markets remain highly volatile??s to facilitate future access to public markets. Citi and Merrill Lynch are the joint bookrunners.

The business is feeding off a government push to regulate professional licenses in various industries in order to lift the overall skill levels. According to CDEL's listing document, the company believes there is a need for Chinese companies to steadily improve the skill and effectiveness of their workforce to compete with foreign rivals and this will create a growing demand for qualified staff in areas like accounting, law, finance, marketing, IT and general management. And on a personal level, the increasing competition in the job market, and the possibility of improvements in career prospects, are motivating job seekers and professionals to develop their skills and knowledge.

Online education is still a relatively new concept in China, but one that has a lot of growth potential given the increased importance placed on higher and professional education and favourable demographic and consumer spending trends.

"CDEL is trying to get people used to national education on an online basis and make it the further education of choice. This is a huge market if the model pans out," notes one source.

According to iResearch Consulting Group, China's online education market is expected to grow to about Rmb32.8 billion ($4.7 billion) by 2010 from Rmb14.5 billion in 2006. Meanwhile, fellow Chinese market research firm CCID Consulting notes that the professional education and test preparation market in China??nline and offline??as growth to Rmb75.0 billion in ($10.7 billion) in 2007 from Rmb45.2 billion in 2005 and projects that it will more than double to $155 billion by 2010.

U.S. investors have seemingly already caught on to the growth opportunities in China's education market with two other U.S.-listed Chinese companies in this sector having held up reasonably well in this year's difficult market environment. New Oriental Education and Technology Group, which also provides test preparation services and teaches English to Chinese professionals, has risen 356% since its IPO in September 2006, including a 9.1% rally overnight ahead of the release of fourth quarter earnings today. It saw a sizeable drop in January, but after hitting a bottom of $51, it has gained 34% to Wednesday's close of $68.44. It is still off 15% since the beginning of the year, however.

The second comparison, ATA, caters to the same market but instead of pre-exam preparation services it provides online exams?? business that observers describe as less scalable. It is one of only two Chinese companies that have completed a U.S. listing this year and while it raised only $46.3 million in the January IPO, it has gained 26% since then, trading at $12 mid-session on Wednesday.

Investors will obviously be hoping for a repeat of these performances and people close CDEL's IPO say it has already attracted quite a bit of interest from U.S. funds focusing especially on investments within the education sector. It is also expected to draw some attention from small-cap funds targeting China. Parallels are likely to be drawn with New Oriental in particular and may be helped by the fact that CDEL's CFO Ping Wei worked as a director of finance and controller at New Oriental until earlier this year.

One source argued that it should be slightly "easier" to do IPOs in the U.S. than in Hong Kong at the moment because there are more sector-specialist funds with research teams of their own that understand the business well. As a result, IPOs in the U.S. tend to be less momentum-driven.

"In Hong Kong many investors??nd retail investors in particular??ave been beaten up by the sharp decline in recent IPOs and the expectation now is for a decline of 20% from the IPO price [in the secondary market]," he says.

Yesterday's newcomer, Sociedade de Jogos de Macau (SJM), held up well though, falling only 1.3% from its HK$3.08 IPO price to a close of HK$3.04. However, volumes were thin with only 82.3 million shares traded out of an IPO size of 1.25 billion shares.

According to a source, the IPO price values CDEL at 15.6 to 18.8 times its projected earnings for the fiscal year to September 2009, which puts it at a significant discount to New Oriental and at a modest discount to ATA??f priced at the bottom of the range. New Oriental and ATA trade at price-to-earnings multiples of 29.3 and 16.4 respectively, when adjusted to refer to the same 12-month period to September 2009. New Oriental has a fiscal year ending in May, while ATA's fiscal year ends in March, making their unadjusted numbers not quite comparable.

CDEL has grown rapidly in recent years, but is still quite small with revenues of only $11.8 million in fiscal 2007 and $5.2 million in the six months to March 2008 (up from $3.8 million in fiscal 2005). Net profit has risen from $300,000 in fiscal 2005 to $5.4 million in fiscal 2007. However, in the six months to March 2008, the net profit amounted to only $800,000. The company estimates that it earned a net profit of between $200,000 and $300,000 for the three months to June this year, which compares with a bottom line of $1.7 million in the same period last year. The decline is partly due to costs of $300,000 to $600,000 related to the issuance of employee share options in April and May. Revenues for the latest three-month period are estimated to reach $3.9 million to $4.4 million.

In the latest fiscal year, CDEL had approximately 504,000 enrolled students, which was more than double the 233,000 students it taught in fiscal 2005.


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