Yet Another Value Podcast - Guinea Value's Jingshu Zhang on $EDU

Episode Date: August 24, 2025

In this episode of Yet Another Value Podcast, host Andrew Walker is joined by Jingshu from Guinea Value to discuss New Oriental Education (ticker: EDU), a Chinese education services firm. They explore the company’s dramatic fall in 2021 following regulatory crackdowns, its surprising rebound, and its resilience in the face of industry headwinds. Jingshu shares rare firsthand insights from his own experience founding a similar business, giving unique context to New Oriental’s position in the market. Topics range from working capital dynamics and regulatory shifts to capital allocation and AI’s impact on education. Tune in for an in-depth look at one of China's most compelling turnaround stories.__________________________________________________________[00:00:00] Andrew introduces podcast and guest[00:02:16] Jingshu greets and intro begins[00:02:55] New Oriental company history overview[00:05:02] Reasons Andrew invited Jingshu[00:05:32] Jingshu’s personal edu background[00:09:41] China edu sector decline insights[00:10:24] Market misunderstanding and tail risks[00:16:03] Discussion of regulatory risk[00:22:25] Cash position and asset value[00:25:43] Livestream business background[00:27:26] Capital return strategy discussion[00:33:57] Michael’s conservative cash mindset[00:38:28] AI disruption and edtech impact[00:43:19] Challenges of AI competition[00:46:06] Superstar teacher dynamics[00:48:44] Andrew closes the episodeLinks:Yet Another Value Blog: https://www.yetanothervalueblog.com See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimer

you're about to listen to yet another value podcast today's episode we have shoo from guinea value shoe has a really we're talking about new oriental education the ticker there is edu see the full disclaimer at the end of the episode for all the risks and everything associated with international stocks but she has a really interesting perspective on this business because i won't spoil it here but he's just got a lot of insights that your average person reading a bunch of SEC filings wouldn't have because, again, I won't spoil that here, but I think it's a really fascinating idea. We have a very interesting conversation about all sorts of stuff, and it's not just about TV. We talk about all sorts of up on races of business, capital allocation, all

that. He brings a lot of really interesting anecdotes that, look, I think you're going to enjoy, I think this is unique podcast. We're going to get there in one second, but first, a word from our sponsors. Today's podcast is sponsored by AlphaSense. Look, AlphaSense and Antigas are two of my longest time subscriptions. They're two of the podcast longest time sponsorships. I love them both, and I'm so glad they merged. The product is awesome. I've done so much work with them. I consider probably, not probably, definitely the most valuable subscription I've got between

Alpha Sense burgeoning AI tools. They're getting better every month, and particularly the expert library on both them. Look, I'll give you a little secret. I'm always pushing myself to be a better investor, and one of the ways I'm trying to do that is I've pushed myself to once a week, I do an expert call on a company or sector that I'm researching come rain or shine. And it's just a really interesting way to be tapping into new ideas, people who are actually operating, get out of the spreadsheets, get out of the SEC filings, and actually talk to somebody about what's going on in industry. I do that myself, out of pocket.

Alpha Sense doesn't pay. Tegas doesn't pay. That's just me. But I mentioned that because, look, I think it's really continuing to help improve me as an investor. You'll notice it in the podcast when I talk to people. I do expert calls on the companies we're going to discuss. and I just show it like I get real value out of it and if you're a fundamental investor interested in learning more diving deeper, I think you will too. So Tegan's half a sense. I love the product. They've been a long time sponsor and I'm happy to keep having them on the podcast. All right. Hello and welcome to yet another value podcast. I'm your host, Andrew Walker. With me today, I'm happy to have on from Guinea Value. Shuzam. Shoo, how's it going?

I'm doing great. Thank you for having me, Andrew. I'm really excited about this. I was telling you before. I think your background on this company is. It's not a company I would normally follow, but with your background, I think it's super unique. So before we get there, quick disclaimer, nothing in this podcast is investing advice. Always true, maybe particularly true today, because we're going to be talking about an international stock. So that carries all sorts of extra risks and all of that sort of stuff. But shoot, the company we are talking about today is New Oriental. They do trade domestically. The ticker is EDU, but obviously New Oriental. People might be able to guess this is Chinese

ed tech. Just love to toss it over to you. What is New Oriental? and why are they so interesting? Yeah, so a New Oriental is an education service company based in China. They were founded by Michael Yu back in 1993, and they went public on the New York Stock Exchange in 2006. So if you bought them at IPO and you hold them until July the 21st of 2021, you would have compunded your capital over there 15 years at about 28% per year. So it's a very successful componder.

But then if you look at the chart, the stock collapsed 95% because of a policy that come out from China. So that's the ultimate stress test of this company. And from the low, it has come up about 350%. and I believe it is very undervalue. So it's quite a saga. And other than the episode in 2021, which we can get a long more in depth with, there is another incident in backing 2012. This is actually a pretty famous Chinese ADR in the U.S.

Because Muddy Waters shorted the stock. Like they came up with a short report. The stock, like on that, they lost 35% of its market cap. And a pre-split, the reverse split, I think it went from $20 to like high single-digit. However, the investigation found nothing wrong because Michael is one of the most ethical entrepreneur, not just in China, but from all the companies that I cover on global basis, he's probably one of the most ethical. So nothing was found guilty, so the stock recovered. And he bought back shares. He personally bought a lot of shares.

at the bottom as well, issued more auctions to his employee to incentivize them. So that was another small episode. So this is a story of Better Ground Stock that has compounded very successfully. I believe it will continue to do so. I've got a lot of questions, and I had forgotten about the muddy water short, but I do want to dive into a lot of questions, but I think what's particularly here is you've got some background and some interesting insights to the space. Do you just want to come on?

I mean, you know, if I was having a cancer research on the podcast to talk about cancer research and we didn't talk about a cancer stock and we didn't mention that they knew what they're talking about, I'd be remiss. So let's just talk about because I think your background here just led so much credence and interest to the argument. Do you want to talk about that? Yeah, of course, of course. So I personally funded a business.

So New Oriental started off as helping students in China to come to the United States. So it's overseas test prep, like GRE, GMAT, TOE, OATs, and overseas consulting businesses. So I did my undergrad at Cornell University, and I did my Ph.D. at MIT. So in my first year at MIT, you know, as the acronym, PhD implies, poor, hungry, and driven. And I was, you know, my current wife, she just became my girlfriend. and I want to make some extra bucks. So me and my partner, we started an overseas consulting business that does exactly the same as New Oriental.

So I know this space very well, we grew the business very successfully from 2012 all the way to 2019. Can you just say exactly what your business was doing? Because you said overseas consulting, but I don't think you said what you guys were doing. Yeah. So because of the cultural and the language differences, the Chinese students have a lot of difficulties.

to craft the assays and to prepare for exams. They don't know how to apply, you know, the online common app system and so on. So we help them with streamlining their entire application process, providing them with guidance. That's, you know, in the U.S., it's like, you know, most of the U.S. students probably apply for colleges on their own. But in China, it's very difficult.

It's a very high barrier-of-entry type of task that needs help. So we grew that business to about 3% of the study abroad for U.S. graduate school of the market share, and we compete directly with New Oriental. I respect Michael and all the consultants there tremendously. The chief operating office, one of the chief COOs, we hired work. was coming from, he actually came from New Oriental and he's of a top caliber, a very strong execution skills and very excellent services. But at the end of last year, we sold the business because, you know, after Trump got elected, I directly called my partner, who's the CEO of the

company, and I said, we should get rid of this thing because it's not going to work. And we were able to sell the business at a severe discount to what it would be worth because, you know, the COVID times was very difficult. We even take on a revolver to keep the business afloat. It helped me tremendously to manage working capital and marketing team and so on. And it was extremely tough and then Trump got elected. I was like, this is an endless plague and I just went out of it completely. So we sold a business and this year we are seeing IDP, which is an Australia business at a measure more than 50% of the global IOTS exam, like the stock utterly crater.

If you like a flywire from where it went public, it's down like more than 70%. And if we still have the business, this year, we are going to lose millions of dollars of a month. And however, what is impressive about New Oriental, the market is not happy that they are guiding overseas consulting and services with a minus, with like minus four to five percent growth for this year, despite all the visa craziness and all the trauma possibility and everything. Yet other players, me and a lot of the colleagues and the peers that I know in that industry are getting decimated in an absolutely brutal fashion.

So declining 45 percent, I think it's extremely. impressive. That's why I'm very bullish on the stock. They will come back stronger than anyone else, just like they used to. I think that's such a unique insight, right? Again, Chinese you don't understand it. And then you hear down 5% and you're like, oh, that's bad, but it's one of those classic things. Yeah, but the market's down 30 and you're down 5, you're taking huge amounts of shares. And if the market ever stabilizes, normalizes, or heaven forbid, grow, you know, imagine what that has. So I just think that's such unique insight. Let me just start with the question I like to ask every.

Yes, market's competitive place. This stock is actually pretty well covered. I was surprised. You know, J.P. Morgan's got some research. I think I saw a Goldman analyst. There were several other really big banks analysts on the call. So just fast, you know, markets competitive place, the stock's well covered. What are you seeing that the market's missing that makes this an alpha opportunity?

Yeah, yeah. So I have talked with many people on the buy side and the sale side, not just in the U.S., but in China as well. Their understanding of this industry is probably not as granular as someone who has vatulate in this industry for about 12 years like myself. And in addition, they don't seem to have a lot of the sources of information, such as, you know, how difficult it is for the smaller players. Because the smaller players, they are not public. So that information is not as well covered.

In addition, this is a stock that went down 95% because of a policy tell risk back in 2021. So what happened back then was, you know, I was being, so I just went back from U.S. to back to China. So I was isolated in a hotel room for 14, yes, 14 days, two weeks in Shenzhen. And on July the 24th or 26th, there was a document that came out of called a 42nd document. And that document basically says we want to have a double reduction to lessen the burden for these students. And what double reduction means is, first, we are going to reduce the amount of homework that students have to do. And secondly, we are going to reduce the after-school tutoring there is. So that thing, you know, I remember vividly it was like at 4 p.m. back in Shenzhen, so it's like 4 a.m. in the U.S.

And then, you know, in the pre-market session, EDU and the TAL, they went down 70% 90% respectively. And like that collapse is just like so epic. And I think once you have something like that, it's sort of like the banking industry, like for many years after the great recession, the great financial prices, people still have this stigma associated with that industry. They don't want to touch it. they are afraid that this might happen again. But my variant perception is that precisely because it happened in 2021, and precisely because the Chinese consumer economy is not doing well, and precisely because of a lot of the policy that come out of that 40-second document,

it makes EDU more resilient. And I'll give you a couple of examples. For example, so nowadays, in order to operate, a school or learning center, in China, you have to have something called a school running license. And those license are rarely issued, not at all in China nowadays. That's the first one. And secondly, just like the tobacco industry, it is like if you advertise in a noticeable fashion, you immediately get killed.

So people can't advertise much at all compared to before 2021. So before 21, you go to a bus stop, and it will be like ads all over the place, like education, send your kids here, send your kids there. And like the government is like, you know, the kids are like, they are being butchered here. So stop all that. And so now there are no advertisements. So brand awareness is extremely important. And Tao and the EDU have the highest brand awareness in China.

No more licenses. So supply is significant. significantly constrained. And therefore, so it's sort of like a tobacco that, and another thing is that this industry is very, very sticky. And I say that because it has been around for more than a thousand years. Since the Tang Dynasty, the Chinese system, like bureaucratic system, is constituted by, you know, taking exams, climb one ladder at a time to become the top officials.

You have to take exams. It's always exam and preparation-oriented. And, you know, during the Renaissance times, I remember like Voltire and a lot of that Renaissance great thinker from the West, specifically said this kind of meritocracy is exactly what we need in the West. And so this picking the exam and Excel type of system rather than holistic review like we have in the U.S. we'll always be here.

And it's very resilient. And as I remember, there's an anthropologist, Clifford, Geertz, who said culture is a web of significance that we all ourselves have spun. Once we spawned a culture of a web of significance, it's very difficult to get out of it. It's extremely sticky. And we are seeing that.

So after the crackdown, what the government noticed is that the parents are just as competitive as ever in sending their kids. to all sorts of children's schools. And because you no longer have the scale that is provisioned by a tell, an EDU, the price for that is actually higher for the middle class income, like families in China. It's more burden, not less. And it's just as competitive.

So the government is sort of like one eye open and another eye closed, and it's like you guys can come back and do this again. So the profitability of EDU has eclipsed what it was before the crackdown. But the stock's nowhere even close to where that was. That's because people are scared. I've got to be honest. I think this is the first time someone's used Renaissance history and Renaissance theory to pitch stock. But I love that pitch.

It's really great. And I think people are, you've obviously got deep inside to the sector. But let me just slightly push back here, right? We've started this podcast off by let's put Muddy Water. We started this podcast off by talking about two tail risks that has hit the sector. The big, big one where I do remember waking up and seeing these stocks down 70%. Was Bill Wong from ArchGos in the stock? I think he might have been.

I can't remember for sure, but do you know? I don't think he's in this one. He's in Tencent Music. Okay. I thought he was in this one too. But we've talked about, regardless, we've talked about two different tail risks hitting this company, right? The first in the big one, 2021, government crackdown on advertising everything.

And the second, smaller, just one piece of the overall business, but the overseas consulting business that you talked about. And I do hear you, but I worry, I've got this concept of risk riding, right? And what it is is kind of you buy a company and it goes off 15% per year for eight years and you're like, this is a great business, it's a compound or whatever. And then in the ninth year, you know, there's that old, the turkey thinks the farmer's his friend for a thousand days and then he gets a set chart. Risk grinding is kind of like that.

You get 15% per year. You think it's a great compound. and then in the ninth year, the ax could be, you know, Google answers your market or the government changes the regulations, all that sort of stuff. In this case, in 2021, it was the government changes the regulations. In 2024, 25, it was Trump changes it. And I just have to wonder like, hey, this might generate alpha if you just looked at your screen and held it for two or three years, but are you actually generating alpha or are you kind of doing that risk riding? And, you know, in 27, the government comes and says, hey, actually we're changing the rules

again, we don't like this. Does that make sense? Yes, absolutely. So I guess we can view the volatility as risk. But to me, before the Double Reduction Act that come out, the stock was trading at like 30, 40 times earnings. To me, that's risk because the valuation is so high. And after it got butchered, the market only gives valuation to the overseas business.

And the K-12, K-212 is completely wiped out. Like, it's not in their evaluation. And all the cash on the balance sheet is not. So at that time, although the perceived risk of the greatest, but actually the risk is the minimums. And now, when we look at a business, you know, my view, like many value master is that the greatest risk is the so-called permanent and capital loss.

Maybe we amassing this thing and we get killed, it goes into restructuring a bankruptcy court and then we lose all the capital. So I think that analyzing the balance sheet is important for this business. You know, as Buffett said in the last

annual meetings, he said I spent a lot more time analyzing balance sheet than income statement which is different from the Wall Street. So the balance sheet of the business, this is really a fortress balance sheet. So when I reach out to you, I think the business was trading on $7.1 or $7.2 billion net today, I think $7.8 billion at $48 or a change of per share of market price. Out of that $7.8 or whatever market cap,

$5 billion is cash. Now, one thing with this business that has one of the most of beautiful business models, which is negative working capital business model. So when I was doing business, Brozzi, which is my own company, we used to, so when a kid comes like a freshman student come to us, she pays that $10,000 for service up front. And we provide that service over a three, four year time period. And after we provide the service, we pay the consultants, especially the foreign consultants and such. So the money comes up front and the cost goes out later. So you have this negative working capital with a huge amount of the quote-unquote float that we can use to, you know, invest in, you know, back then I was investing the stock

market. You're using that capital. And if you just do 10%, then your free cash flow margin changes from 30% to 40% per year. So it's a very cash generated type of business, negative working capital model. And so they have $5 billion. Of course, If you want to be conservative, the deferred revenue, the things that you have not provided service for, you exclude that. That's $2 billion. So it has a net cash of $3 billion. And after the double reduction, a lot of the teachers have to go home or whatever. So Michael, being a very ethical entrepreneur, wants to think of something to accommodate these remaining teachers as much as possible.

So they started a separate business called New Oriental, called East Buy Select. So it's a live stream e-commerce business that primarily sells agricultural products for various smaller cities and locales. And through that live streaming platform, and also a new business called a tourism business, it helps the local governments tremendously,

Because now the farmers can sell their agricultural products. Now they can attract more tourists to their cities and bring fiscal revenue. And through those two ways, two prongs, it further enhanced its relationship, friendly relationship with the local government. And just to add one more thing is that they hold 57% of East Dubai, which is a publicly traded company. on the Hong Kong Stock Exchange. And based on yesterday's close, that 57% stake is about $3 billion. I didn't even see that when I was looking at it. That's crazy.

So if you look at this East Dubai, which is $3 billion, and you have a net cash, net excluding all the deferred revenue of $3 billion, add together $6 billion. So you have this $6 billion, and the market cap is $7.4.4. A. And it was even lower when I reached out to you. So it's like $1.8 billion of net market cap, excluding those two divisions. And the next year, they are going to generate a free cash for more than $500 million, more like $550 million. So now, no, no, I mean, look, it's all something incredible. Let me try and push back on a few things. The first thing, I did not know

about their agricultural live stream business. Let me ask me, I mean, this is a business that it's new oriental education. And you say, hey, this is great for them. They take these people who would have been out of work because of largely the Trump policies and everything, you give them the job. But I hear, hey, a company expanding into agricultural live stream from education, like, I don't get it. And now I do know, like Chinese companies, kind of like Japanese companies,

they have their pies in every tense, call everything. But when you say it, it sounds, oh, cool, they're doing this. And then you think about it, you're like, wait, what? I just looked at like, wait, what? I'd love to ask that. Yeah. So if you recall, back in 2021, so the policy killed like the K-12 temporarily, at least for a year or two. Michael doesn't want to fire all those teachers and want to find something for these teachers to do.

So it was really unintentional. He was not thinking of building like this, you know, in terms of marketing. have this bigger business, but he was just trying to solve the problem for the teachers such that they still get a job, they still get a salary, so they don't have to go back to the rural area where they come from, for many of them. However, there is one guy who has already left the company called Dong Yu Hui. And TikTok was taking off in 2021, 2022. Remember, matter was killed, like, all the fear, like TikTok was doing everything right over those two-year period. And TikTok was growing so fast and this live stream just went phenomenal. And there were so many

people buying and it just becomes an incredibly profitable business for this company that grows very quickly. So it's sort of something that was done unintentionally just to try to solve the K212 type of issue with the teachers, but it actually blesomed. However, it is not a focus for them. And Remember, there's another thing is you can't do a lot of advertising. So Michael and all the executives, they leverage this platform to do brand advertisement for themselves. Because you can't advertise like every part of products like your platform, that's fine. But it associated with New Oriental and they can talk about books, talk about life and so on to make people be more aware of their brand. So it actually has some synergy with their education business, which you can to address us.

Let's go to the balance sheet. So you are right, right? This is a fortress balance sheet. They've got all this cash. They've got the investment. I hadn't even picked up. I just saw short-term investments. I assumed that was short-term. I didn't think that was, you know, 55% of a publicly treated Hong Kong stock exchange. But they've got four and a half, five billion whatever of cash and investments on a seven-and-a-half, eight-billion mark cap company. That sounds great. great. And to their credit, they have bought back shares in the past. They came out with their new three-year plan and they said, hey, 50% of net income going forward. We're going to return it to shareholders in some way, shape, or form. So it's not like they don't do capital returns. But,

you know, if I was being critical, and I have been critical of things in the past, I like financial engineering. I like debt. I like share bybats. I have friends who do not. But when I look at this and say, hey, you've got an $8 billion market cap company with $5 billion of cash on the balance sheet. And yes, there are negative, there's negative working capital, everything. But if I just looked at it, I'd say, hey, your biggest issue here is actually that, yes, the stock might look cheap on kind of an EV to EBDA basis, but the cash drag is really big here. And that's to say nothing of, you know, I'm sure most investors remember 2012 to 2014, all the Chinese, you mentioned muddy waters with this short report, but just the overall Chinese

market where you'd find these companies, it was like, hey, there are a $2 billion market cap with $1.4 billion of cash on the balance sheet. Why is that? Well, because all they do is raise money and their whole operations are a fraud. I'm not accusing this of that by any extent, but I do think that overhang plays when you think, oh, $8 billion market cap, $5 billion of cash, big cash dragon. This rings a bell of a lot of these stocks that blew up 10 years ago. So I taught throughout a lot of thoughts there. I'd love to just kind of get your thoughts on my thoughts. Yeah, yeah, definitely, definitely. That's a very valid critique. And I'd like to offer a personal experience.

Please. Yeah, yeah. So me and my partners, in 2019, we were, that was the most profitable year for our previous education cost of our business. We made so much money and for us, like a small scale. Anytime anyone says we made so much money, I'm very happy for them, whether it's $20 or $20 million, very happy. So I even had the pleasure and privilege to.

go to the Central Tower and Beijing to be interviewed by one of the very famed host for the 70th birthday of the Communist Party as a representative of the education, small company education space. So we made a lot of money. All the dividend, so we don't like the cash track. So at the end of every year, because we have been expanding and it's negative working capital business model. So we were like, why do we need so much cash? Because every March, the season comes in the student, the cash just churn out. So we paid all the dividend out in January, February of 2020. And then COVID hits.

Like, I got lucked out from my perspective because when I was a PhD at MIT, I covered a commodity structural market. So I understand oil, gas market very well. So I put all that capital into the oil gas space in March when oil price went to negative. But for the business, it's not that lucky because it's already all divvied out. And our chief operating officer, after COVID hits, he left the company. He's like, this industry is down for it. And this entire sales team, like two of the top sales left the company because one of them went to become a government official.

And the other went to music consulting because they think like study abroad. That's the end of it. And in Shanghai, we have office in Shanghai, Hongzhou, two of the major cities in China, were shut down for more than two months. Like, students,

parents cannot come to visit. That's the first incident. And we, at that time, we realized the dividend is already paid out. We can't get it back. We have to take on a revolver to the credit of the government.

They make the interest rate really low. We took the credit out of the revolver, a railroad from construction bank, and that saved our ass. And in 2021, the business bossed back, and we started to pay out the dividend again. But that's a near-death experience. I had to cut a lot of the people on the marketing team for that. And the second one is with EDU. So in 2021, July, when that double reduction policy come up.

So in China, a teacher or an employee of a certain company, if you have stayed with this company for, let's say, seven years, If I, let's say I worked for you and you for seven years and you said, you know, sure, I'm going to fire you. If you want me to go, you have to pay the so-called M plus one salary. So you have to pay my salary that's worth seven months because I have worked for you for seven years, plus one, which is eight months of salary. So there are a lot of like old employees in New Oriental who have worked their tail off for Michael that he has to fire and he has to pay all these folks. You can't say, like, force major, because these people, and I have had this unfortunate experience. Some of them would go to the arbitrary court, and the court in China will always favor the consumers and the employees, always.

Like, the employer is very unfortunate in China. So you have to pay out. So Michael had to pay out something like, I think, one or two billion dollars because of, like all these employees are leaving with that and plus one. So as someone who have gone through that kind of near-death experience, he probably has this conservatives in his mind. So you have a valid critique here. So actually, me and another, you know, I'm not sure if I should disclose,

but the 13 of us, there are 13 institutional master, including myself, I'm the small fish. There are some really big folks out there. we own more than 10% of this company. And we all admire Michael tremendously. We wrote a very polite letter to their executive team. And we said, we understand you want to preserve $3 billion of cash on your balance sheet. We did the most stringent stress test of 2021.

We think you can survive with that $3 billion. So perhaps can you consider pay out a bit more that 50% of your net income back plus year holders. Of course, I've already talked with one of their executive on this matter, and she said, once we hike it to 50%, we are not going to lower it ever. Like, it will be there forever. That's the first thing. And second thing is they usually are conservative.

So when it died to like 5%, it will usually come out to be 7% and 8%. So they want to be conservative, and last year they paid a special dividend. And they bought back like $7 million their shares, and they paid a $100 million of special dividend on top of a market cap that's $7,8 billion. So that's quite healthy capital return. And I think we are making progress and they are likely to hike the dividend payout ratio, but it will take a little bit of time. And we hope it to be win-wing.

In China, we don't engage in that kind of car, I-com type of, you know, you're just going and you want to fight everyone. We try to resolve it peacefully with a double-wing type of situation. So to echo your concern, yes, we try to get a pay-out ratio a little bit higher. But the balance sheet, we also, we understand Michael. We see it from his perspective, we can understand it. As someone who has gone through that kind of experience in 2020, I think preserving some cash will be good.

First, thank you for that story. It's really unique to hear somebody who can say, hey, look, I went through this and this is, I think I see. It makes total sense to me. You know, my only worry is like, let's say 2021 was a once-in-a-hundred-year storm for the industry or something, right? That as we said, this industry dates back to Renaissance Times Plus. I worry that any company that says, hey, we've built this company up to weather of, once in a hundred-year storm. It sounds really good. And, you know, there is the Buffett. Any number times zero is zero. But you often find that companies that do this, like, they're just so over-reserved

that it's ridiculous. And at some point, it does become a drag on their, a drag on the business, right? Like, that cash drag is a huge drag because if you're paying 60% of your market cap in cash, then the business really needs to perform for you even to get like kind of stock market like returns, right? And I kind of worry that if they're so wedded to this, like, as we said, they're returning 50% of net income for the next three years, two shareholders. And as you said, they tend to be conservative. They'll probably beat that. Even if they pay back 60%, like, that cash balance is just grown bigger. And it's just like, man, I don't know, you know, there might be structuring or, you know, could they run this with $2 billion? And then every

year, you know, throw another $250 million onto the balance sheet until they hit $3 billion and to draw back down or something like it just it feels very conservative to whether for hey what if we have to lay off like half our sales force because of regulatory changes and pay them all huge change of control huge termination fees it just uh it feels pretty pretty slow um yeah i go ahead understood yeah so so it probably has something to do with the personality of the founder So Michael is really sort of an imaginary guy. So in China, there's this so-called national entrance examination for colleges. Like, you have to take this exam.

Like, it's sort of like SAT, but a lot more important than SAT. So he took this exam the first time, and he's not the brightest of its types, let's say that. And he himself admits that. So he didn't do very well. So he waited another year, took it again, and still didn't do that well. took it again in the third year, finally worked. And he got into Peking University, which was one of the top two. However, it's one of the worst and easiest departments,

which is the language department, which is not popular like physics, you know, those types of things. Yeah, physics, all the girls, all the glory, all the hype. I know. Right. So, yeah, so he is someone who is very down to the earth. And, you know, he actually did not want to take this company public. It's because he had two other partners that really want to get rich.

Like, they ended up ultimately leaving the company and formed the venture arm, which Michael also holds here with, it's a very famous called Zheng Ge Fund, which is a very famous venture capital fund in China that specifically tried to help. So New Oriental sends students out. When students go back to China, the venture capital farm will help them to launch business. So it's kind of like a Y-combinator spin-off over there, yeah. Yes, so it's sort of a close route, right?

That's awesome. And so Michael is from the rural area. He does not want to take the company public. He doesn't care about one. But, and he's born in 1962, if I remember correctly. So he's 63 years old. We are trying to change his mind, and he has already changed his mind quite a bit by, you know,

with all the buyback and dividend. But things take time. And we are trying to a gently and friendly measure. And hopefully, you know, he will get. And his mind is actually changing. It's changing more and more like capitalist oriented in capital return, especially since the, I mean, it's still going to be grow at the EPS. It's going to keep growing at mid-double digit.

So it's not a no growth, like slow growth. company. It's a very cheap mid-teens EPS broke company, and the capital return should ultimately increase over time. I believe. I have faith in my point. Let me ask one last question here, right? Ed Tech, you mentioned the core business is tutoring students, basically, right? Training them for these tests and everything. Anyone who's been following the stock market knows AI is here, it's coming and ed tech has been the area where I would say just in the public markets you've seen the most disruption right I would point to chag which was a cheat cheats for college students and that business has been crushed but I think it's really impacted and there's a lot of reasons

it's really impacted in my opinion education first first because there's great data online about education but second because education users tend to be youngsters who tend to be early adopters of education. Like, I just think it's a, it's, education is the forefront of AI in my, my opinion. I might be slightly overstating there, but I don't think I'm saying anything too crazy. It strikes me, you have an education company that, you know, they're advertised in, but it is expensive. They're offering a bespoke product. Yes, if you can improve the test scores, people will pay anything to, you know, improve their children's test scores. But it strikes me that this is a place where AI is, it's very vulnerable to AI. So I just want to ask all of that

you is, is AI a riskier? Or you could come to me and say, hey, AI, where you used to need one tutor for every five students with AI, one's tutor for every 20 students. So you get a little bit more, you get better results. You get more pricing power. You need less tutors. Boom, profit margins through the roof. And you've got proprietary data because you've got 30 years worth of test scores and training. So I could actually see either route. I'd love to just ask you, AI, risk or opportunity here. Yeah. Yeah. I believe, you know, the fascinating part is rare. So in China, the primary school is like 1th grade to the 6th grade. And then junior high is like a 7th to 9th. And the senior high is 10th to 12th. It's a slightly different

part of the year. So if with junior high, because of that K2 9, you know, double reduction is primarily focusing on K2 9. So you can't teach the kids subject oriented like courses anymore. So for junior high, how do you prepare for the so-called the juncture? This is the entrance exam to get into the best senior high schools. So it's very involuted, if you will. And for junior high, since you can't teach the subjects, you have to rely on artificial intelligence. You can't have the teachers anymore. So what they do is that they sell devices. So in these devices, there would be

like words and phrases already written. There will be teacher with recorded videos that the students will buy this device, take home, and watch this. And there will be teacher in the back end. If you have any question, you can ask the teachers. And in addition, they have so much, they have like decades of data of student behavior. They know what type of student it is. And they will provide you, based on your learning curve, the corresponding types of questions that help you to climb up the learning curve the best. Like, they will first prompt you with easy questions, then slightly more sophisticated, then cross-disciplinary, the most difficult problems in the exam.

And because they are doing this, they no longer need to have learning centers. They don't have to pay the land board. They don't need schools. They don't have to lease those. They don't have to have classrooms nor teachers, and the scalability of the business makes the operating margin of that segment actually higher than three double the... Can I pull on that first second? Because what you just subscribe is PANCIA for a business, right?

It's awesome. You get rid of it. But my only counter to that would be, hey, that sounds great. But all of this is AI on the Internet. Like, you're eliminating a lot of the fixed costs. And once you eliminate those fixed costs, don't you expose yourself to... You and me tomorrow could go release Andrew and choose, like incredible tutorial, right? With AI, all this knowledge and stuff, like, don't you expose you, don't you really lower

the barriers to entry? So yes, you've removed the cost, but now the barriers to entry are gone and a thousand products can flood the market. And maybe these guys are the best, but maybe you and I could launch a product that's 95% is good and gets up to 98% as it generates more data. And we launch it at, you know, 20% of the cost, 30. I don't know. I'm just speculating, but it does seem to me.

like there's the risk that it always sounds great when you take all the margin out, but you take all the margin out and all of a sudden, hey, you know, unlimited demand in newspapers, right? Hey, we're going to lose all the, we don't need to print everything anymore. We lose all this. And then, oh, yeah, but now it's unlimited distribution and there are thousand places in all the newspapers are bankrupt. Like, that is a loose analogy, but I could see how that holds here.

So you just want to ask you that question. Yeah. Yeah. Yeah. So, Andrew, if we were to start a business like that, we need to like first need to have like really like star level teacher who is willing to do it for us. You went to MIT. I'm relying on you, man.

I'm from the South. I can barely read. Oh, come on. So I guess, you know, the best teachers, they want the most amount of, like, connection, right? So they probably want to go to a bigger platform

that can give them that, like scale. That's the first one. And secondly, we need to collect a lot of questions. And thirdly, we need to have a lot of the data to really know when to give the student the best type of question, the prompt, to help them learn the best. And lastly, we need to have the resources that we put into developing not just the hardware, but the software and the marketing and sales expenses. So it's...

No, that's a great answer. Can I ask you the question in one more way just because, as you say, it strikes me. I do remember China has like much more superstar teachers than the United States. I say this, you know, from a literal thousand mile, three thousand mile radius. But I do remember hearing a lot about the superstar. You know, I do wonder, so new at EDU does have advantage of this. They have the data. They have the built and infrastructure.

But you know, in the United States, you've seen a Mr. Bees, Instagram influencers, all this sort of stuff, really supplant the legacy networks because distribution became free. and Mr. Bees is launching chocolates, right? He's trying to disrupt Hershey's. Ten years ago, I would have told you no one could launch chocolates and disrupt Hershey's. Will it be successful? Yes, no, I don't know. But you are seeing people build the brands into themselves and capture all the economics.

I would point to Joe Rogan. I'd point to Mr. Bees. We could point to any number of examples here. And I do wonder if I said, hey, with all this AI tooling, maybe the celebrity, right, the celebrity teachers that you're mentioning, maybe they partner with new EDU, but they get much higher revenue shares because the celebrity is what drives the sign-ups. The celebrities, or maybe they say,

hey, I don't even need new EDU. As we've seen so many, I mean, Joe Rogan 20 years ago would be on Sirius X-M. Howard Stern, I think that's obviously a different generation, but his contract with Sirius X-M's running up, I wouldn't be surprised if he's launching a podcast. Stephen Colbert, he's getting fired from CBS. I bet you he will make more running a podcast

than he was at CBS. So I just wondered if these superstar teachers that you mentioned drive actually maybe they take more or maybe they just launched their own network. So that will probably be my last question, but I'd love to ask that because I find this fascinating. It's a great question. Actually, this has what you described, the star teacher leaving the company to set up their own has happened throughout the existence of the business. And the reason for that is if you're a teacher there, I mean, after all, you are getting sort of a fixed salary, maybe some incentive. maybe some shears. But if you form your own studio,

then you can capture all the profit. So it's almost, has always been the case that the best teachers at EDU are Tau, they would leave and form their own studios. Yep. But this market is, firstly, it's a very fragmented market, even in the most concentrated parts like Peking where Tau and EDU both are located there,

they have a combined market share of only about 15%. So there are a lot of studios out there competing with them. So competition is probably something familiar to that. And secondly, you have a constant replenishment of new talent that need to go to EDU and tell once they have the system that cultivate these teachers, then they just, every year, you know, the fresh out grads, They will go there and work a couple years, maybe they leave.

But the system is still the strongest at EDU and tell. Of course, what you mentioned, you know, for the hardware and scalability question, can we have something like that? I think the answer is probably yes, especially for junior high. I'm not sure whether it will be the case for the senior high because the learning quality is just not as good if you are not like face-to-face. with that teacher, especially for senior high where you have a lot of the difficult questions like math, physics, biology, that you want to have someone to see exactly how

you think I walk you through that logic, train of logic. So I think, you can see that in retention. Their senior high school retention rate is something like 80%. But for junior high, despite the high operating margin, the retention rate is only 60, 70%. So I believe senior high is less of a threat. Junior high, yes, they can be threatened. and it would probably be something that if you and I'm already a shareholder and if you end up being a shareholder, it's probably something that we need to keep a close eye on. However, it's so fragmented. I feel like there are so many like mom and pop that will be weeded out in this long slope with a lot of snow.

This was great. Well, shoot, I don't know if you heard my phone was just blowing up. So I'm sure something terrible or awesome is going on in the portfolio. So I'm probably going to have to call this. But you, this is great. She writes at guineavalue.com slash blog is what I thought. But you know what we're going to have to do. You've got to write more.

I don't think there's been a post up there since late 2024. The people are, after this podcast, the people are going to demand more writing, man. We've got to get some written word up there. Yeah, yeah. So I have a substack. I update that. At the end of every year, I will replenish all the letters up there. So that substack, it's also.

I think it's just called Guinea Valley. I have a substack that I replenish almost a bimonthly basis. Perfect. Perfect. Well, hey, this has been a ton of fun. This was a really fascinating idea, so I really appreciate you hopping on. And I really appreciate you hopping on walking through all of this sort of stuff. And we're going to have to have you back on at some point to talk about some.

Maybe you do a lot more than just Chinese. So maybe it's something else, but I'd love to have you back on and we'll go from there. Sounds good. Thank you so much for having me. Andrew, I have always been a fan. It's so nice talking to you in person, finally. I really appreciate that. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.