Markets & Finance

Marcial: A China Play Beyond the Olympics


Testing-services provider ATA presents an attractive opportunity in the country's booming education market

Chinese stocks have lost much of their allure as they have tumbled from their 2007 peak levels. Even so, the hunt is on for stocks that likely will reap a bonanza from the 2008 Summer Olympics in Beijing, which commences on Aug. 8. That isn't surprising, but the better strategy is to snap up shares of Chinese companies that will remain champs even after the summer extravaganza is long forgotten.

One such outfit is ATA (ATAI), a leading Beijing provider of computer-based testing services, including career-oriented educational programs. It went public in the U.S. on Jan. 8, 2008, at 9.50 per ADS (American Depositary Share) on the Nasdaq. It has since perked up to 12 for one basic reason: Earnings and revenues are going gangbusters.

For its fiscal year ended Mar. 31, 2008, ATA's revenues soared 103.6%, to $24.6 million, and operating income totaled $3.7 million, or 17¢ per ADS, vs. a loss in the previous year.

"Because of China's booming economy, there has been a greater emphasis on education, and the result is a surge in demand for educational services—including testing programs," says Michael Moe, chairman of investment firm ThinkPanmure in San Francisco, who scouts for growth stocks worldwide. Moe is widely known as the first Wall Street analyst who recommended buying shares of Starbucks (SBUX) before it became a gigantic market winner.

Moe is convinced that once Wall Street gets wind of ATA's solid fundamentals and strong earnings growth potential, the stock will zoom. Right now, the stock is little followed and still unknown to most institutional investors, notes Moe. He figures the stock will hit 20 or higher in 12 months based on its impressive earnings momentum.

A Tech Edge Over Competitors

Investors have yet to grasp the company's vast potential, he adds. For example, there has been an upsurge in the volume of test-takers at China's Ministry of Labor & Social Security, notes Moe. He expects ATA, which has 1,854 authorized test centers located throughout China, has a lot of room to grow. ATA projects that net revenues in 2009's first fiscal quarter will climb between 149% and 161%.

Scott Schneeberger, an analyst at Oppenheimer (OPY), who rates the stock outperform, says there are more than 100 million test-takers in China each year. And he notes that about 95% of those tests are still paper-based, which presents a significant opportunity for ATA since those tests will likely have to be converted to computer-based tests, which are more cost-effective, scalable, and reliable. He says the company established high barriers to new competitive entrants because of its advanced technological advantage that it has developed over the nine years of its operations. Gross margins from ATA's testing and testing-preparation services, says Schneeberger, range between 60% and 90%.

Another big bull on ATA is Mark Marostica of Piper Jaffray (PJC), who rates the stock a buy with a 12-month price target of $24 per ADS. He forecasts earnings of 48¢ per ADS for fiscal 2009 and 69¢ for 2010. The consensus forecast among analysts is even higher, according to Zacks Investment Research: 54¢ for 2008 and 79¢ for 2010.

With the Chinese stock market currently in a sluggish mode, the strong performance of ATA makes it quite an attractive stock, says ThinkPanmure's Moe. "ATA represents a sensational growth investment idea," he adds.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

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