Single Best Trade: Veteran fund manager picks Chinese…

Single Best Trade: Veteran fund manager picks Chinese stock

The past four years have been rough for many Chinese companies listed on U.S. exchanges, as China’s government has squeezed its private sector.

For example, e-commerce titan Alibaba (BABA) has lost nearly three-quarters of its market value (off 73%) since October 2020. But Alibaba and other Chinese stocks have bottomed this year (and some last year).

Jason Hsu, founder of Rayliant Global Advisors who formerly co-founded Research Affiliates.
Rayliant Global Advisors

Within sectors, education is one of the most important in China, as the country seeks to compete economically with the West. And New Oriental Education & Technology Group (EDU) is a major player in the field.

Until a government crackdown on tutoring in 2021, after-school tutoring accounted for 50% to 60% of New Oriental’s revenue.

Morningstar’s assessment of New Oriental

“After terminating its K-9 academic after-school tutoring business, New Oriental has identified a few new initiatives, such as nonacademic tutoring and intelligent learning systems and devices,” according to research firm Morningstar.

“The remaining businesses include high school academic after-school tutoring and overseas-related test preparation and consulting business. The company also owns 55% of East Buy, a market leader in livestreaming e-commerce.”

The new initiatives look promising, given New Oriental’s expertise in after-school tutoring and curriculum development, wrote Morningstar analyst Cheng Wang,

The new businesses accounted for only about 17% of revenue in fiscal 2023, “but growth is robust, and we project a 27% revenue contribution by fiscal 2028.”

Jason Hsu’s view of New Oriental

Jason Hsu also likes New Oriental. He’s chief investment officer of money-management firm Rayliant Global Advisors. Assets of $17 billion use its strategies, and the firm manages four ETFs, focused mostly on foreign stocks.

Hsu has been in the money management business for more than 25 years. He founded Rayliant and co-founded esteemed money manager Research Affiliates.

He’s an avid model builder – and not just financial ones, but warplanes, "Star Wars" and "Star Trek" spaceships, and "Transformers" robots.

Hsu recently discussed his top stock pick with TheStreet.com. It's part of our "Single Best Trade" interview series.

What is your single best trade idea?

New Oriental. It specializes in helping students prepare for exams that are necessary for Chinese students applying to U.S. and western universities. That includes the SAT, GRE, GMAT, Toefl and AP tests.

These educational programs don’t conflict with Beijing's regulation prohibiting for-profit cram schools from offering tutoring services for grades K-9.

What do you like about New Oriental?

The substantial rise in Chinese students applying to study abroad signals record earnings growth for New Oriental.

The company’s stock price cratered nearly 90% when Beijing first forbade for-profit education companies from tutoring. This price reaction was irrational, as New Oriental’s revenue was largely in tutoring services which fell outside the regulated areas.

Indeed, after the restriction went into effect, the company’s revenue declined by less than 30%, compared to reductions in excess of 80% for competitors.

More Expert Interviews:

So New Oriental’s selloff became a tremendous buying opportunity for contrarian investors. [It traded at $70 Aug. 19, down 32% over the past five years, but up 40% over the last 12 months.]

Beijing has partially reversed course on its tutoring restrictions. However, many of New Oriental’s competition has fallen by the wayside. Its revenues have reached record highs, but the stock is only 35% of its peak.

What could go wrong with New Oriental stock

The stock’s rally over the last year could create meaningful selling pressure, even if the valuation is still extremely attractive.

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