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Oriental Century
June 26, 2007, 3:29 am
Filed under: companies analysis

Oriental Century (SGX: 5II)

As of 17 May 2007

  • EPS: 0.04118/share
  • P/E ratio: 29.140
  • Earnings Yield: 3.43%
  • 52 Week High: 1.65
  • 52 Week Low: 0.390

The One Minute Story

Oriental Century provides education management services to educational institutions in China, and sets up kindergartens and high schools under its “Oriental Pearl” brand name.

Financial Analysis

YEAR

2006

2005

2004

2003

2002

Book Value Per Share

0.208

0.071

 

 

 

Cash Per Share

 

 

 

 

 

Cash Flow Per Share

0.042

0.060

 

 

 

Earnings Per Share

0.045

0.050

 

 

 

Dividend Per Share

N/A

N/A

 

 

 

Dividend Payout Ratio

N/A

N/A

 

 

 

Net Profit Margin

50.4%

45.5%

 

 

 

Return on Total Asset

17.6%

28.6%

 

 

 

Return on Equity

19.7%

55.4%

 

 

 

Current Ratio

7.9

1.4

 

 

 

Long Term Debt of Capitalisation

N/A

N/A

 

 

 

Fantastic net profit margin, great current ratio, high ROE, with no long term debt. All the financial ratios seem to indicate a great company.

Why Buy

  • Obscene profit margins, financially sound company
  • Scalable business model: build schools all around China
  • Riding on the growing Chinese trend towards placing importance on education. With globalisation and increased income levels, Chinese parents will be more able to put their precious kids through private schools. Given the one-child policy, education is all the more important in China.
  • Raffles Education owns a 20% stake in it. Raffles Education might use its financial clout to grow this company.
  • The demand for private education might be inelastic; parents might perceive it to be exclusive and more prestigious and of higher quality than conventional education. This bodes well for profits. Supply is also restricted in the sense that places in school is limited and this might bid profits up when the business is scaled.
  • Strong shareholding by directors; the CEO owns 24.07% of the shares while Raffles Education owns 20.16%.

Why Not Buy

  • Price of SGD 1.20 is way too expensive. Using the discounted cash flow model with growth rate of 10% and a discount factor of 5% (being very modest here), the price is SGD 0.50.
  • Problem of invisible competition; I can’t seem to find any information on the competitive nature of the education industry in China. Probably would be cut throat.
  • Oriental Century, for all its profitability and positive financial ratios, remains a very small company, which makes it susceptible to fluctuations in the economy and industry problems.
  • The Chinese government might improve its state education system, hence reducing the demand for private education.

Potential Problems

  • Education as an industry becoming very competitive in China.
  • Chinese education policies that improve the quality of education will reduce the demand for private schools.

Strategy

  • Wait for price drop before buying.
  • Monitor for revenue growth.

Disclaimer: The author bears no responsibility for any financial losses caused by reliance on the author’s views. Investors are advised to do their own research before making their investment decisions.

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