Chinese Investing in Education

If anything will bring down the cost of higher education, technology will. We’re already seeing the leading edge of this technology, although the cost-reduction benefits are still lagging far behind.

Online education providers like University of Phoenix and DeVry pioneered the remotely-accessible, asynchronous learnrning environments that are now disrupting the traditional brick-and-mortar university system in the U.S.

For more than a decade, most traditional universities ignored online competition. Now, they’re playing catch up in the game called “if you can’t beat ‘em, join ‘em.”

Realizing the demand for non-traditional education environments, traditional universities are ramping up their own online offerings. Eventually, as online education becomes commonplace at traditional universities the cost of higher education will come down.

The online modality is simply more cost effective than the brick-and-mortar model, and cost-savings will be passed along to students eventually.

With increased competition from once-traditional universities, are the best days behind the likes of University of Phoenix and DeVry?

Perhaps. At any rate, the low-hanging fruits have already been picked.

In China, though, it’s another story.

The online education and private tutoring market there is just building steam. As some Chinese families have enjoyed an improving standard of living over the past decade, they’re increasingly reinvesting their newfound wealth in the education of their children.

Here’s a chart taken from an investor presentation from Xueda Education Group, one of China’s largest private education providers, showing the increase in education spending.

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As you can see, many Chinese families are spending upwards of 30% of their income on education. That dwarfs the 4% or 5% they invested in education back in 1985.

This increase in spending will clearly bolster the bottom-line of for-profit education companies, some of which are accessible to U.S. investors.

Shares of Xueda, for instance, trade on the New York Stock Exchange (symbol: XUE). I haven’t fully vetted the company’s fundamentals, but the stock’s pricing is quite attractive at$5.14 and a forward price-to-earnrnings (P/E) ratio of 18.

More research is warranted, but China’s education providers may prove to be a better bet than companies operating in the U.S. market, which is both saturated and in the midst of a significant shake out.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.