China Distance Stock Forecast: There’s an old quote attributed to Benjamin Franklin that says “An investment in knowledge pays the best interest“–but could it also have a more lucrative benefit for those who invest in education companies?
China is the most populated nation on the planet, and its burgeoning middle class (400 million people) means that there is no shortage of adults interested in improving their education. These events have arisen simultaneously with the growth of the Internet as a medium for training and education programs.
Enter China Distance Education Holdings [NYSE: DL], a Chinese company that provides online professional education and licensing programs.
The online education market in China is projected to more than triple in the coming years. According to a report by UBS Securities, the Chinese online education market will grow from 29 billion yuan ($4.1 billion USD) in 2017 to 104 billion yuan ($14.7 billion USD) in 2025.
But will China Distance Education Holdings be able to take advantage of these trends, or will DL stock be a bad future investment?
What Does China Distance Education Holdings Do?
China Distance Education Holdings [NYSE: DL] is a holding company that provides online and offline education services and sales of educational products to the Chinese market.
The company focuses on professional education for three main sectors: accounting, healthcare, and engineering and construction.
It offers courses and books to assist students in studying for different professional licensing examinations, including the Certified Public Accountant (CPA) Qualification Examination, the National Practicing Medical Doctor Qualification Examination, the National Pharmacist Qualification Examination, and the Associate Constructor and Constructor Qualification Examinations.
Founded in 1998, China Distance Education Holdings is currently headquartered in Beijing. Zhengdong Zhu is the co-founder of China Distance and currently serves as the company’s CEO and chairman of the board.
The company’s competitors include other providers of online education to the Chinese market, such as the China Online Education Group, which provides English as a second language instruction.
Less direct competitors include providers of offline education and management services for Chinese schools, such as Hailiang Education Group and Puxin Limited.
Is China Distance Education Holdings a Buy?
Online education is a rapidly expanding industry in China.
In 2015, there were 110 million Chinese users of online education. Just three years later in 2018, this number grew by 63 percent to 179 million, with a total estimated market value of 300 billion yuan ($42.5 billion USD).
As one of the leading providers of online education for the Chinese market, China Distance Education Holdings is well-positioned to take advantage of current and future growth.
Education is an important priority in Chinese culture, and online education programs like China Distance have made it easier and more convenient than ever before for the Chinese middle class to gain knowledge and accreditation.
More importantly for investors, China Distance stock has several positive metrics, and the company posted strong results in its Q3 2019 report. For example, China Distance’s non-GAAP net income was up 73 percent year over year to $10 million, while its operating cash inflow was up 42 percent year over year to $18 million.
Revenue in Q3 2019 was $62 million, which was driven primarily by the company’s accounting courses, as well as sales from its learning simulation software.
Enrollment in China Distance’s Accounting Test Preparation premium classes increased by 130 percent versus Q3 2018, helping to increase cash receipts by 32 percent year over year.
What are the Risks of Buying China Distance Education Holdings?
Although China Distance Education Holdings [NYSE: DL] seems to be in a good position for growth right now, no stock is entirely without risk.
For China Distance and other Chinese stocks, one major concern is the potential for a slowdown in the Chinese economy.
In Q2 2019, China’s GDP increased by just 6.2 percent, its slowest rate since the government began tracking these statistics in 1992.
Problems with the Chinese economy mean that the country’s middle class will have less money to spend on China Distance’s educational offerings, which could harm its profitability and growth prospects.
While China Distance’s financial figures are mostly positive indicators, there are a few more worrisome ones as well. For example, the company’s profit margins have been steadily decreasing over the past several years, from 22 percent two years ago to just 7 percent currently.
In addition, China Distance stock has had a bumpy 2019 thus far, with shares sliding by roughly 33 percent between January and August.
China Distance Education Holdings Stock Forecast: Summary
Stocks of Chinese companies such as China Distance Education Holdings [NYSE: DL] offer a compelling investment opportunity for traders who may not be familiar with the Chinese market.
Because these stocks are less familiar, however, investors need to be sure that they don’t fall into a “value trap,” where a stock is deceptively cheap but a poor investment.
China Distance’s price to earnings ratio currently stands around 7, which is inexpensive for a company that seems to be set up well for future growth. Now seems like an excellent opportunity for investors to snap up shares of China Distance while the stock is currently in a slump.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.