China Education Alliance (PINK:CEU)

Rodman and Renshaw on CEU                      01/21/2011

CEU – Termination of Coverage 

TERMINATION OF COVERAGE 

Effective immediately, we are terminating coverage of China Education Alliance (NYSE: CEU) to allocate resources more effectively within our coverage universe. Effective upon the termination of coverage, any of our prior financial projections on this stock should not be relied upon. Our last rating on CEU shares was 'Under Review.’

COMPANY DESCRIPTION 

Founded in 1996, China Education Alliance is a private education company that provides online and on-site learning services to children ages 6-18 for their standardized secondary school exams. In early 2009, the company expanded into vocational training for adults 18+ given the surging unemployment rates for recent college graduates in China. Geographically, CEU’s operations began in Heilongjiang Province but recently expanded into adjacent regions including Liaoning (2008) and Inner Mongolia (2009). It has three reporting segments: 1) online education 2) training center; and 3) advertising.


Notice Regarding Privacy and Confidentiality: 


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on CEU                                                                       10/07/2010

CEU: Investor Call Inadequate; Rating Under Review

WHAT HAPPENED? 

China Education Alliance (NYSE: CEU) hosted a prepared 45-minute call to address shareholders’ concerns over the fraud allegations initiated by Kerrisdale Capital in its 28-page report.

OUR VIEW 

We were initially encouraged by CEU’s timely responses, as the company 1) categorically denied all allegations contained in the report; 2) announced a conference call to address shareholder concerns; 3) verified that the company’s auditor, Sherb & Co., LLP has confirmed its cash balance as of the end of 3Q10; and 4) announced its annual shareholder meeting to be held on December 20^th in Beijing, while also welcoming investors to their Harbin facilities the following day.

However, the forcefulness of CEU’s response is inadequate in quelling investor concerns and in debunking the allegations. In addition to proof that its secondary education portal, www.edu-chn.com is functioning, we were expecting the company to provide to investors substantive material including 1) pictures of its training facilities showing that they are currently operational; and 2) a list of its training facilities with verifiable addresses. While we have not uncovered evidence of fraud in our own forensic studies of the company and its operations, we believe that the company has to step up in providing hard evidence of its operations and accuracy of its financials before shares of CEU stock can experience meaningful appreciation. This also includes the verification of its cash balance and preferably, a one-time audit of its latest quarterly financials filed with the SEC, by a reputable third-party that CEU has not partnered with in the past.

Rating Under Review. The stock has been treading at little above the $2.50 cash on its balance sheet, and we believe that there has been overly negative reaction to the call. That said, we are placing our rating under review given the lack of clarity on CEU’s near-term revenue and earnings prospects. As noted on the call, the branding of an education company goes hand-in-hand with its ability to generate revenues. Therefore, the fact that the CEU brand is tarnished, even if temporarily, will impact its revenue-generating prospects near-term, in our view. We also believe that unless the company releases more substantive evidence of the extent of its operations as depicted by its SEC filings, CEU shares will continue to be driven by speculative plays, resulting in a high degree of volatility.


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on CEU

3Q10 Results. CEU reported 3Q10 EPS of $0.17, a penny below the consensus EPS estimate of $0.18, as a modestly better-than-expected topline and gross margin was offset by operating expenses that we view to be crucial for brand-building and driving sales of online debit cards. Consolidated sales rose 40.5% YoY to $14.4MM, with outperformance in online education, which grew 49.6% to $8.6MM. Training center revenues grew 35.6% YoY to $5.2MM. The gross margin expanded 294 bps YoY to 83.3%, sustaining momentum from LQ. The SG&A rate rose 605 bps YoY to 43.0%, as a result of a 70.1% increase in SG&A dollars to $6.0MM. Overall, the net income margin came in at 36.6% vs. 40.8% LY. 

Appropriately focused on the topline. We are pleased with CEU’s focus on growing its topline. In light of the company’s less than 5% market share in the four Northeastern provinces (Heilongjiang, Jilin, Liaoning, and Inner Mongolia), we believe that market share capture should remain the company’s top priority. Given that the start of the school year was an opportune time for brand-building and boosting sales of its online debit cards, the heighted sales & marketing spend in 3Q10 should pay dividends throughout the school year, in our view. Already, we have noticed that deferred revenues (unearned portion of debit cards sold and tuition payments received) have risen to $2.2MM from $0.84MM LQ and vs. $1.25MM LY, which should bode well for 4Q10 sales. 

Near-term Catalysts. 1) CFO Zack Pan will be presenting at two investor conferences over the next two weeks; 2) Cash deployment plans – potential $7-$9MM acquisition of a building in Beijing to erect a flagship training center and establish CEU’s brand name in the education epicenter of China; as well as a potential acquisition of a vocational training company.

Maintaining Market Outperform Rating and 12-month PT of $9. We are revising our 4Q10 EPS estimate to $0.17 from $0.19 previously to account for modestly higher SG&A expenses compared with our previous forecast, but are maintaining our 2011 EPS estimate of $0.76. Trading at 7.0x our 2011 EPS estimate, we still view CEU shares as significantly undervalued compared to their Chinese education peers listed in the U.S., which are trading at an average 2011 P/E of 27.3x. These peers, on average, have comparable topline growth rate outlooks as CEU (expected 2011 sales growth: 36.1% for peers vs. 30.0% for CEU) but carry significantly lower net margins (expected 2011 net margin: 15.3% vs. 38.0% for CEU). As CEU’s organic EPS growth accelerates from single-digits currently to 20-30% for 2011, it would be more difficult for investors to not see the value. Our 12-month price target of $9 assumes nearly 12x our 2011 EPS estimate, in our view.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.