The shares of this Chinese education company were just initiated at Jefferies with a ‘Buy’ rating.
RYB Education, Inc. (RYB)
From Cabot Emerging Markets Investor
RYB Education, Inc. (RYB), with a market cap of $635 million, is a player in the crowded field of for-profit education companies in China. But it isn’t trying to take on giants like TAL Education and New Oriental Education in a head-to-head battle for tutoring and test-preparation services. Rather, RYB, which opened its first education center in 1998, is essentially a kindergarten company, providing age-appropriate services for kids from infancy through six years old.
The company operates nearly 1,000 franchised play-and-learn centers and 212 kindergartens in over 210 Chinese cities and towns. RYB’s play-and-learn centers for kids from birth to two years are unique among Chinese educational offerings in that they involve both the child and the family. As the name implies, the idea is to promote interaction among the whole family that will benefit the child when more structured learning begins.
Kindergarten operations offer that more structured learning, giving young pupils the skills to succeed when actual school instruction begins. Kindergartens supply more than 70% of RYB Education’s revenue via tuition fees, with 13% coming from the sale of educational merchandise, 10% from franchise fees and the balance from the sale of school uniforms and other products.
RYB Education turned profitable in 2015 and increased revenues by 30% in both 2016 and 2017. The company’s Q1 earnings report was full of information about plans to improve the training and compensation of staff at its directly operated kindergartens as well as enhancing security and safety standards. Despite the late timing of the Chinese New Year and terrible weather just before Chinese New Year, revenue in the first quarter increased 8%.
Management expects increased spending on training and operational support as likely to slow franchise revenue in 2018, but that will only be temporary. And analysts are estimating that the company’s earnings will increase by 65% in 2018 and by a whopping 152% in 2019 when training and support spending diminishes.
RYB came public at 18.5 in September 2017 and traded in the high 20s with peaks over 30 until a disappointing earnings report on November 29 sank it back into the teens. But the stock’s action at that point indicated that investors viewed the stock positively, as RYB built a nice base over the next six months, including two months of tight, flat trading at 17 in April and May, usually a sign that no more supply is coming to market. The stock burst up to 23 in June, then got caught in the general market weakness late in the month and dipped to 19 but has shown some power in getting back above 22.
Ultimately, the attraction of RYB is in the size of opportunity for growth via both franchising and organic growth. The total number of the company’s kindergartens and play-and-learn centers has grown from 627 in 2014 to over 1,200 today. In the second quarter, the company acquired an 80% equity interest in four of its franchised kindergartens in Shandong province for $6.2 million and purchased two additional kindergarten facilities that are ready to be used. The company’s stringent selection, training and certification process for inclusion in the RYB network will keep quality high and enrollment figures growing.
With the Cabot Emerging Markets Timer flashing a brand-new buy signal, it’s time to start gradually increasing our exposure to the market. Accordingly, we will add a half position in RYB to the portfolio. Just be aware that RYB is thinly traded, so expect choppiness on a day-to-day basis. BUY A HALF
Paul Goodwin, Cabot Emerging Markets Investor, www.cabotwealth.com, 978-745-5532, July 26, 2018