New Oriental: Even the worst disasters shall pass away
After the 2021 regulatory catastrophe, New Oriental emerged with a strong brand, bulletproof balance sheet, and rising market share. Its stock, however, still trades as if the nightmare never ended.
It is said an Eastern monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: “And this, too, shall pass away.” How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!
Abraham Lincoln recounting the ancient Persian fable in 1859
New Oriental is a high-quality, dominant franchise in a structurally attractive niche. It survived the 2021 regulatory shock, rebuilt profitability, and is now consolidating a fragmented market. Yet Chinese after-school tutoring (AST) remains ‘untouchable’ for most investors, creating a large gap between EDU’s price and its underlying brand and scale advantages.
A scarred industry rebuilding
New Oriental is a private education provider focused on after-school tutoring and overseas college prep (e.g., SAT, TOEFL, LSAT). The AST market remains highly fragmented, with tens of thousands of sub-scale local players and intense competition. Even as the largest player, EDU only had about 1% market share in 2023. TAL is the second largest AST business and is a key competitor on a national scale.
In 2021, the K-12 AST industry was effectively crushed by the “double-reduction” policy, which briefly outlawed core tutoring. Enforcement was often brutal, with anecdotes of tutors being arrested in police-raids. Thousands of weaker operators have exited or perished, while leaders like EDU and TAL have been taking share. Even though the harshest measures have eased, marketing for tutoring remains heavily constrained, which makes pre-2021 brand equity and word-of-mouth the primary demand drivers.
With regulation now more stable, EDU is positioned to keep gaining share from smaller players, driven by its brand recognition, national footprint, and scale economics.
Why EDU is structurally advantaged
EDU’s core business is highly cash generative and capital-light. The main costs are classroom rent and teacher salaries. Parents typically pay most fees up front, which creates a low or even negative cash conversion cycle. This is effectively free, non-interest-bearing funding (“float”) that can be reinvested to compound value.
Historically, the biggest weakness of many AST businesses has been talent portability: star tutors often have stronger personal brands than the institution and can walk out to start competing centers. That dynamic has kept the market perpetually fragmented.
Today’s regulatory environment changes that equation. Because AST players and independent tutors cannot openly advertise, new entrants have to rely almost entirely on word-of-mouth. That massively favors incumbents like EDU and TAL, whose brands are already top-of-mind for parents. The marketing ban therefore does two things at once:
It pushes demand toward the largest, most trusted brands.
It makes it much harder for sub-scale players to gain traction and become national competitors.
If these rules persist, they will likely act as a growth flywheel for EDU: existing brand awareness drives new enrollments, which further reinforces word-of-mouth and perceived quality.
In addition to its brand power, EDU also benefits from having a massive library of education content (e.g., past exams, study guides, etc.) it has built over the last two decades that can be shared across its national network. This is a scale-driven cost advantage that smaller AST providers do not have.
Financials that don’t look “distressed” at all
EDU’s recent financials underline the strength of the franchise:
High ROIC: After adjusting for excess cash and short-term equity investments (primarily its controlling stake in East Buy, which should not be treated as working capital), EDU is generating roughly 40% ROIC.
Earnings power above pre-crackdown levels: Aside from 2022, EDU has been consistently profitable. Operating profit has rebounded to about $500M LTM, above the $400M pre-2021 peak.
Balance sheet strength: Through the worst of 2022, EDU still held at least $1B in excess cash while many sub-scale competitors were forced into debt-funded survival. The contrast in resilience is stark.
This is not a wounded asset limping out of a crisis; it is a leaner, more dominant EDU operating in a less crowded market—much like how fire-resistant redwoods benefit from occasional wildfires that wipe out the competing plants.
Valuation: the market is still fighting the last war
Despite this setup, investor sentiment remains skeptical.
At around $8.8B market cap, with $1.28B in cash, $3.3B in its East Buy stake, and $780M of debt, EDU’s enterprise value is roughly $5B. Over the last twelve months, it generated about $600M in free cash flow, implying an EV/FCF multiple of ~8x. For a leading consolidator with a strong balance sheet and high ROIC, that is extremely cheap.
A reverse DCF on these numbers suggests the market is pricing EDU for only 3–5% annual growth over the next decade. That is well below reasonable base rates:
From 2012 to 2019, the number of Chinese students studying abroad grew roughly 9% per year.
EDU is not only exposed to that demand but is also taking share from weaker players in a still-growing, partially rebuilt market.
A more plausible mid-case is growth at or above market rates, not half of them.
So why the pessimism? Most likely, investors are still traumatized by the 2021 wipe-out and are over-discounting regulatory risk—similar to how financial stocks traded for years after the 2008 crisis. The business has moved on; the narrative has not.
How value can surface even if sentiment doesn’t heal
Even if global investors stay on the sidelines, EDU does not need the market’s enthusiasm to create shareholder value. Management has multiple levers:
Buybacks: EDU has a buyback authorization of $300M over the next 12 months and has already repurchased about $580M of stock this year.
Ordinary dividend: Management has committed to returning at least 50% of net income as dividends going forward.
Potential special dividends: EDU could accelerate value realization by distributing more of its excess cash balance in the future, even though this has not yet been done.
At an 8x EV/FCF multiple, aggressive repurchases and disciplined dividends can compound per-share value even if the headline valuation multiple never re-rates.
A broader lesson on where to fish
New Oriental is a good example of the kind of opportunity that can emerge in high-quality small and mid caps operating in out-of-favor markets such as China, Mexico, or South Africa. These markets are often shunned for macro or political reasons, even when individual companies have dominant positions, strong balance sheets, and disciplined capital allocation.
Meanwhile, reasonably priced ideas in the US—especially in popular tech/AI stocks—are increasingly scarce as capital crowds into the same names.
The implication is straightforward: if you want attractive risk-adjusted returns over time, you need to be willing to look where others aren’t. EDU is one of those cases. Make sure you’re fishing where the fish actually are, not just where everyone else has decided to cast their lines.