Guinea Value's Jingshu Zhang on $EDU
Summary
Jingshu Zhang sees New Oriental Education ($EDU) as a battle-tested compounder whose 2021 collapse obscures a stronger competitive position. From its 2006 IPO through July 2021, the stock compounded at roughly 28% annually before China’s “double reduction” policy drove a 95% drawdown; it has since rebounded about 350%. Zhang calls the crackdown the company’s “ultimate stress test” and believes the shares remain materially undervalued.
Zhang’s edge is operational: he has spent roughly 12 years in the industry and competed directly with New Oriental through his overseas-admissions consulting firm. His firm once served about 3% of the US-graduate-school study-abroad market, but he sold it after Trump’s election because the outlook had become “endless pain again.” While smaller competitors are now being “decimated,” EDU guides overseas consulting and services to decline only 4–5%—an outcome Zhang considers extremely impressive and evidence of exceptional resilience.
The crackdown may have converted political trauma into a structural moat. New school-running licenses are “rarely issued, if not at all,” advertising is heavily restricted, and EDU and TAL retain the strongest brands; meanwhile, China’s exam-driven culture remains intensely competitive. Parents simply moved toward scarcer, more expensive tutoring, leading regulators to tolerate some return of supply—so EDU’s profitability has already surpassed its pre-crackdown level even though its stock has not.
The valuation case rests on assets and cash generation rather than merely a low earnings multiple. Against a roughly $7.8 billion market capitalization, Zhang counted about $5 billion of cash, or $3 billion after deducting $2 billion of deferred revenue, plus a 57% East Buy stake worth approximately $3 billion. That implies roughly $1.8 billion for the remaining operations, which he expects to generate more than $500 million—closer to $550 million—of next-year free cash flow.
Andrew Walker’s central objection is that EDU may be “writing risk”: collecting years of steady returns before another regulatory or geopolitical axe falls. Zhang counters that 30–40 times earnings before the crackdown was riskier than today’s asset-backed valuation, because his primary definition of risk is “permanent capital loss.” EDU’s fortress balance sheet and negative-working-capital model materially reduce restructuring or bankruptcy risk, even if they cannot eliminate volatility.
East Buy’s agricultural livestreaming business was an accidental survival mechanism that became both valuable and strategically useful. Founder Michael Yu created alternative work rather than dismissing teachers after the crackdown; the platform then took off as TikTok and livestream commerce grew. Besides producing a publicly traded stake worth about $3 billion, East Buy lets EDU discuss books, life, agriculture and tourism—effectively sustaining brand awareness when direct education advertising is constrained.
AI improves EDU’s junior-high economics but also creates the episode’s clearest competitive risk. Adaptive devices use recorded teachers, backend support and decades of student data while eliminating classrooms, leases and much of the teaching cost; Walker responds that the same digitization lowers entry barriers and empowers superstar teachers to capture the economics themselves. Zhang concedes junior-high retention is only 60–70%, versus roughly 80% in senior high, making this “something that we need to keep a close eye on.”
Deep dive
1. Zhang’s operating history turns a weak headline into a share-gain signal
New Oriental was founded by Michael Yu in 1993 and listed on the New York Stock Exchange in 2006. Zhang calculates that an IPO investor holding through July 20, 2021 compounded at about 28% annually—until the regulatory shock erased 95% of the stock’s value. Its subsequent roughly 350% recovery supports his description of EDU as a “storied battleground stock,” but not yet, in his view, a fully valued one.
The 2021 collapse was not EDU’s first credibility test. Muddy Waters published a short report in 2012, wiping out about 35% of the market capitalization that day; Zhang says the resulting investigation found nothing wrong. Yu bought shares personally, the company repurchased stock, and employees received additional options—an episode Zhang offers as evidence that Yu is “one of the most ethical entrepreneurs” he has encountered globally.
Zhang’s edge comes from roughly 12 years in the industry. While completing an undergraduate degree at Cornell and a PhD at MIT—“poor, hungry, and driven,” as he jokes—he co-founded a business guiding Chinese students through exams, essays, the Common Application and US admissions. It eventually served about 3% of the US-graduate-school study-abroad market and competed directly with New Oriental.
That business also supplies Zhang’s variant data point. After COVID forced it to borrow for survival, he and his partners sold at a “severe discount” following Trump’s election; without the sale, he believes it would now be losing millions of dollars monthly. Against that backdrop, EDU’s guidance for only a 4–5% decline in overseas consulting and services looks less like weakness than exceptional resilience.
2. The 2021 crackdown constrained supply without changing parental demand
Zhang remembers seeing China’s “double reduction” Document 42 while quarantined for 14 days in Shenzhen in July 2021. The policy sought to reduce both student homework and after-school tutoring; in US premarket trading, EDU and TAL fell roughly 70% and 90%, respectively. Like banks after the global financial crisis, the surviving education companies retained a stigma long after the immediate event.
Walker’s challenge is that this stigma may be rational. EDU has faced a government crackdown that temporarily killed its core K–12 market, disruption to overseas education from visa and political changes, and an earlier short-seller attack. His “risk writing” analogy is the turkey fed safely for a thousand days before the axe falls: years of compounding do not prove the absence of a hidden terminal risk.
Zhang’s counterintuitive response is that the crackdown made EDU more defensible. Operators now require school-running licenses that are “rarely issued, if not at all,” while conspicuous advertising invites immediate punishment. With bus-stop education ads largely gone, incumbents EDU and TAL possess brand awareness that new entrants cannot readily purchase, creating tobacco-like restrictions on supply and customer acquisition.
Demand, meanwhile, survived because China’s bureaucratic and educational systems have rewarded examination performance for more than a thousand years. Borrowing anthropologist Clifford Geertz’s phrase, Zhang calls culture “a web of significance that we ourselves have spun”—and one that is extremely difficult to escape. Parents remained competitive, tutoring became more expensive, and regulators responded with “one eye open, another eye closed” as EDU rebuilt.
3. The balance sheet reframes volatility as survivability
Zhang does not equate a violent share-price move with fundamental risk. EDU traded around 30–40 times earnings before “double reduction,” which he considers genuinely dangerous; immediately afterward, the market effectively valued only the overseas business while assigning nothing to K–12 operations or balance-sheet cash. Perceived risk peaked just as valuation risk diminished.
His preferred definition, borrowed from value investing, is “permanent capital loss”: an investment entering restructuring or bankruptcy and destroying the principal. That makes EDU’s balance sheet central. At a share price around $48, Zhang estimated a market capitalization near $7.8 billion and approximately $5 billion of cash; deducting roughly $2 billion of deferred revenue still leaves about $3 billion of adjusted net cash.
The business naturally creates cash because customers pay before services are delivered. Zhang’s own company could collect roughly $10,000 from a freshman, provide services over three or four years, and pay consultants afterward. That negative-working-capital “float” can be invested in the interim; he notes that earning 10% on it could turn a 30% free-cash-flow margin into something closer to 40%.
Add EDU’s 57% holding in publicly traded East Buy, which Zhang valued at about $3 billion based on the prior close, and cash plus that stake total roughly $6 billion. Against the $7.8 billion equity value, the implied price for the remaining operations is about $1.8 billion. Zhang expects those operations to produce more than $500 million, perhaps $550 million, of free cash flow next year.
4. East Buy turned a layoff problem into an accidental second franchise
East Buy began after the crackdown left New Oriental with teachers it could no longer deploy conventionally. Yu did not want them forced back to rural hometowns without work, so the company experimented with livestream e-commerce, principally selling agricultural products. Zhang stresses that the outcome “was really unintentional”: management was trying to preserve jobs and salaries, not deliberately construct a multibillion-dollar public business.
As TikTok-style livestreaming surged in 2021–22, the livestream became extraordinarily popular and profitable. The apparent conglomerate drift therefore has an origin Walker initially missed: it was emergency labor redeployment that unexpectedly found product-market fit. Selling farm products and promoting local tourism also strengthened relationships with local governments by generating income for farmers and fiscal activity for smaller cities.
The education business receives a subtler benefit. Direct tutoring advertisements are restricted, but East Buy can advertise agricultural products while its hosts discuss books, life and related topics under the New Oriental umbrella. Zhang therefore sees genuine brand synergy: a seemingly unrelated commerce platform keeps EDU culturally visible without overtly advertising the regulated product.
5. Excess cash is both a drag and the scar tissue of two near-death events
Walker accepts the fortress balance sheet but argues that cash equal to roughly 60% of market capitalization can suppress shareholder returns. Even if EDU distributes 50–60% of net income, the cash pile may keep expanding. His preferred structure would preserve a smaller emergency reserve, rebuild it gradually when needed, and return the rest rather than permanently capitalizing the company for another once-in-a-century storm.
Zhang answers with his own near-death experience. After his consulting company’s most profitable year in 2019, the partners paid out all dividends because seasonal customer prepayments seemed dependable. COVID then closed their Shanghai and Hangzhou offices for more than two months, senior employees departed, and the dividend could not be recalled; a low-rate China Construction Bank revolver “saved our ass,” while Zhang had to cut much of the marketing team.
Yu endured an even larger liquidity shock in 2021. Chinese employees dismissed after seven years could demand “N plus one”—eight months of salary in that example—and courts generally favored workers. Zhang estimates New Oriental paid roughly $1–2 billion to departing employees, making Yu’s conservatism understandable even if it is no longer economically optimal.
Zhang and 12 other institutional investors, collectively owning more than 10% of EDU, have politely urged management to retain about $3 billion but distribute more. Management’s three-year policy returns 50% of net income, while recent actions included buybacks and a $100 million special dividend. Zhang expects gradual improvement: “We try to resolve it peacefully,” and Yu’s mindset is becoming more capital-return-oriented as EPS continues growing at a mid-double-digit rate.
6. AI raises margins precisely where it lowers barriers
For junior-high students affected by K–9 restrictions, EDU sells devices containing vocabulary, recorded lessons and access to backend teachers. Decades of behavioral data let the software move a student from easy questions toward more sophisticated and cross-disciplinary ones along an individualized learning curve. With fewer learning centers, landlords, classrooms and live teachers, Zhang says the segment’s operating margin is higher than 30%.
Walker’s pushback—worth keeping—is that removing physical infrastructure also removes an incumbent barrier. He and Zhang could theoretically launch a competing AI tutor at a fraction of EDU’s price, while celebrity teachers increasingly resemble MrBeast or Joe Rogan—personal brands able to own distribution and demand a larger revenue share. His newspaper analogy is pointed: free digital distribution looked wonderful until unlimited competition destroyed legacy economics.
Zhang concedes that star teachers have always left EDU to open studios and capture more profit. His defense is system-level rather than contractual: EDU offers audience scale, deep question banks, student data, hardware, software, marketing and a recurring pipeline of graduates whom it can train. Yet Beijing remains fragmented—EDU and TAL together hold only about 15%—and junior-high retention of 60–70% trails senior high’s roughly 80%, so AI disruption remains a real monitoring item rather than a dismissed risk.