New Oriental Education & Technology Group Inc (EDU) 2007 Q1 法說會逐字稿

Good evening and thank you for standing by for New Oriental fiscal first quarter 2007 earnings conference call. [OPERATOR INSTRUCTIONS].

Today's conference is being recorded.

If you do have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's call, Miss Sisi Zhao, New Oriental's Investor Relations Manager.

Please proceed.

Hello everyone.

And welcome to New Oriental's first fiscal quarter 2007 earnings conference call.

Our first fiscal quarter earnings results were released earlier today and are available on the Company's IR site, as well as on newswire services.

Today, you will hear from Michael Yu, our founder, Chairman and Chief Executive Officer, and Louis Hsieh, our Chief Financial Officer.

After their prepared remarks, Michael and Louis will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S.

Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risk and uncertainties.

As such, our results may be materially different from the view expressed today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC.

New Oriental does not undertake any obligations to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference is being recorded.

In addition, a webcast of this conference call will be available on New Oriental's Investor Relations website, at http://investor.neworiental.org.

I will now turn the call over to New Oriental's CEO, Michael Yu.

Michael, please?

Thank you.

Good morning or good evening ladies and gentlemen.

Thank you for joining us today on our first investor conference call as a public company.

I am pleased to report to you today that New Oriental began our first fiscal year as our fiscal year on a strong note.

Our total student enrollment in our leading language training and test preparation courses showed a healthy increase from 268,000 to over 337,000, allowing us to grow total net revenues for the first fiscal quarter by over 31% from the same period last year.

Keep in mind that the period from June 1 to August 31 is traditionally a quarter in which we see our strongest result, as larger numbers of students use their summer vacation time to enroll in summer classes to prepare for upcoming tests to improve their English ability and to prepare to go abroad for study.

While we are very excited about the increasing student enrollments we are seeing at our existing schools and learning centers, we are also expanding our leading nationwide network to take advantage of the increasing demand for private education and English study in China.

In fact, during the first fiscal quarter, we opened seven new schools in tier-one and tier-two cities across China.

And we plan to open another two to three new schools in the remainder of our fiscal year 2007, that is in May next year.

As well as smaller learning centers in major cities where we have existing schools already, we expect that enrollment in our renowned test preparation courses will also continue to be a major driver of our earnings growth.

And we will continue to leverage our leadership in this area to expand our offerings with courses that prepare students for an even greater [in the] domestic and international academic and professional tests.

We are also very excited about the potential we see for growth in China's primary and secondary school sector.

This area is still very young in China.

We are already leveraging our strong reputation to take a leading position.

We expect to see continued growth in our [top] kid's English and our high school English enrollments in the quarters ahead.

The enrollments in our Yangzhou private school for primary and secondary students increased from 2,200 last year to 2,600 this year.

We recently opened a new school near Yangzhou in [Qaishin] which offers a similar program and expands our capacity to take our new students from 4,500 to 6,000.

Our pilot international high school program was launched in the first quarter in Yangzhou School which will prepare students to take the international [SHE] or ACT examinations, as well as the standard Chinese high school graduation examination.

This school is also proving very popular.

In fact, we have found that families are willing to pay a premium of four to five times our standard Yangzhou school fees for the plus of flexibility of our curriculum.

We are also excited about opportunities in our other business lines which saw growth of almost 35% from the same period last year, mainly driven by strong books sales, underlying revenues and international study revenues.

We will continue to develop these areas and explore opportunities for value-creating partnership with the international content providers.

Well, before turning the call over to our CFO, Louis Hsieh, to review our financial results, I would like to add that we are very encouraged by the strong reception that our recent IPO received.

As China's integration into the global economy progresses and incomes continue to increase, we believe there is a need for language training, test preparations and private education, we will only accelerate.

And as the leading private education service provider in China, with a leading brand recognition and a proven business model, we feel we are in a great position to benefit from the opportunities before us.

Now I will hand the call over to Louis Hsieh, our CFO, and my friend, to walk you through the financials.

Louis, please?

Thank you, Michael.

And a good evening to everyone in Asia.

Good morning to those of you in the United States.

And good afternoon to those of you calling in from Europe.

As Michael mentioned earlier, we delivered strong results in our first fiscal quarter as a public company.

Before going to the numbers, however, as this is our first earnings announcement as a public company, I would like to talk to you about the seasonality of our business.

As Michael mentioned just now, typically New Oriental sees its strongest quarter in terms of senior enrollments and revenue generation in our first fiscal quarter as many Chinese students take advantage of the summer vacations to enroll in our classes.

In the second fiscal quarter, which is September to November, the formal school year is in full swing and we see -- we normally experience our slowest period of the year, with student enrollment sharply lower than the summer quarter.

In our third fiscal quarter, which is December to February, we historically have seen a rebound from the second-quarter low due to the one-month winter holidays of school-age students who may choose, or their parents may choose for them, to enroll in New Oriental language and test preparation courses.

Now, I will walk you through the contributions of our first fiscal quarter results and the financial highlights.

Our first fiscal quarter 2007, total revenues were CNY429.3m which is equivalent to $54.0m, an increase of 31.4% over the year-ago period.

Revenues from our educational program and services, comprising our language training and test preparation courses and primary and secondary education programs rose 30.8% year over year, driven by an increase in new student enrollment in language training and test preparation courses.

We also saw revenue from books and other education materials and services which rose 44.9% to CNY17.4m, equivalent of $2.2m, from the year-ago period.

Overall operating expenses for the quarter were up 7.7% year over year.

Of these, selling and marketing expenses increased 61.4% year over year, mainly due to higher expenses to promote our brand and our expanded network of schools and learning centers, which extended to 31 cities as of August 31.

General and administrative expenses were CNY74.8m, equivalent of $9.4m, a 21.7% decrease from the same period last year.

This was mainly due to higher share-based compensation expenses incurred in the year-ago period.

Excluding share-based compensation expenses, general and administrative expenses were similar to the same period last year.

Operating margins for the quarter were 42.0%, compared to 29.2% in the year-ago period.

Excluding share-based compensation expenses, operating margins for the quarter would have been 43.3% compared to 37.2% in the corresponding year -- quarter of the prior year.

This increase was primarily due to the improved operating efficiency as revenue growth outpaced the growth of operating cost expenses and goes to show the leveraging of our business model.

Total share-based compensation expenses for the quarter were CNY5.7m, $0.7m.

Of this amount, approximately CNY143,000 was recognized as cost of revenue, CNY99,000 was recognized as selling and marketing expense, and the vast majority of CNY5.4m as G&A expenses.

Net operating cash flow for the quarter was CNY139.3m, equivalent to $17.5m.

Net income for the quarter increased by 100.8%, a doubling year over year to CNY165.1m, equivalent to $20.8m, from CNY82.2m in the year-ago period.

And net income, excluding share-based compensation expenses, increased by 57.5% year over year, to CNY170.7m, equivalent of $21.5m.

Basic and diluted earnings per ADS were CNY6.60, U.S. equivalent, $0.83.

And then diluted shares were CNY5.84, $0.73.

Excluding share-based compensation expenses, basic per-ADS earnings were CNY6.83, equivalent to $0.86.

And then diluted earnings were CNY6.04, equivalent to $0.76 per common share.

Moving to our balance sheet, our total cash and cash equivalent as of August 31 were CNY294.9m, equivalent to $37.1m, an increase of 12.6% from the end of our fiscal year 2006, at May 31, balance sheet.

I will now read to you New Oriental's financial guidance for the second fiscal quarter 2007.

Please note that the following outlook statements are based on our current expectations.

These statements are forward-looking and actual results may differ materially.

Total revenues in the second fiscal quarter of 2007, that runs from September 1 to November 30, 2006, are expected to be in the range of CNY148m, the equivalent of $18.6m, to CNY158m, the equivalent of $19.9m, representing a year-over-year growth in the range of 16.5% to 24.4%.

Now, let me turn the call back to Michael for his closing remarks.

Thank you, Louis.

Once again, thank you all for participating in our first quarterly earnings conference call.

Now we will be happy to take any of your questions.

Thank you.

[OPERATOR INSTRUCTIONS].

Your first question comes from the line of Mark Marostica with Piper Jaffray.

Please proceed.

Good morning or good evening everyone.

And congratulations on the quarter.

Thank you.

My first question relates to a request for a little more granularity on each of the major business lines, test prep and English language training.

Perhaps if you could talk a little bit more about each of the main drivers within each that drove the results on the enrollment side.

Okay.

Thank you.

Good question, Mark.

We don't reveal in deep granularity, as you know, our student enrollment.

But as a general matter, for the quarter just ended, we saw strong student growth, an increase of over 25% year over year.

Now, keep in mind that those are students who enrolled during the summer quarter and paid cash.

That doesn't mean that they took all their courses in the summer.

Some of that will flow into the second quarter.

And some of the students who took classes over the summer were also registered in Q4, our May 31 quarter.

So it's not an exact measure of student growth.

Now, as far as contribution to our results, basically we saw very strong growth in both segments of test preparation, as well as language training.

So in test preparation, for the quarter we had over 112,000 students, which was a significant increase over last year's number.

And on the language training side, we trained over 225,000 students.

So the total student enrollment, including Yangzhou School, just for test preparation and language training, was 337,400.

And that was the 25.8% increase over last year's 268,000 students.

Those -- the revenue contribution from those, basically we saw significant increases, both from overseas test prep, which increased revenues by over 50% year over year.

Domestic test prep increased revenues by over 13%.

And in language studies, basically it was driven primarily by our kid's English, which is ages 5 to 12, and high school English, which is ages 12 to 17.

And we saw increases of over 35% there in both year-over-year enrollment and revenues.

Our other programs, books and online and New Oriental consulting grew about 44.9% to CNY17.4m.

So we've seen healthy increases basically across the board.

Does that answer your question, Mark?

Yes, that's very good.

Moving onto the campus or new school expansion, with regards to the schools that you've opened thus far this fiscal year, could you give us a breakdown of how many of those were in tier-one cities and how many are tier-two cities?

And then a similar kind of view of the campus or new center expansion as you look through the remainder of the fiscal year.

Okay.

Well, of the seven campuses we opened in this past quarter, three of them would be classified as tier-one schools.

And those were in [Hosei], [Qimin] and [Duto].

And the other four in [Onson], [Ooshi], [Oson] and [Ichon] are tier-two schools.

Going forward over the next several quarters, Michael mentioned that we will open two to three new schools.

And those will probably be in -- yes, tier-one schools.

So there will be a total of nine to ten schools for the year.

And then as we look to next year, I imagine we wouldn't expect as many schools as this year.

But could you give us some color on how you see that pan out?

How many school total we have next year, up to the --

For the 2008 fiscal year.

2008 fiscal year.

Really at the beginning of [2008 fiscal year].

We will add another maybe total tier-one, tier-two schools maybe 37 to 38 schools altogether.

That includes learning centers as well, Mark.

So I think it's probably going to be three to five tier-one schools and probably another two to four tier-two schools.

And then we'll open a number of learning centers.

So it's basically many of the cities -- tier-one cities we're in, we will continue to open [top] kid's English learning centers and high school learning centers.

But in a given year, we will typically open 15 to 20 new physical facilities, including schools and learning centers.

Yes.

And we are trying to penetrate deeper into our existing schools and the learning centers also.

Great.

One last question and I'll turn it over.

Regarding Q2 you gave us your thoughts on the revenue guidance.

Last year in Q2 I believe you recorded a small loss.

Would we expect a loss in Q2 as well?

Q2 is hard to predict at this point.

The revenues we're more or less comfortable with, the CNY148m to CNY158m, which is, if you mid point that, it's a 20% increase year over year.

The expense side is we are trying to control the expenses.

And last year, as you mentioned, we lost $1.1m or CNY8.7m.

And we're going to do our best to make it a non-loss-making quarter.

But it's typically the slowest quarter of our fiscal year, as mentioned, by far.

In fact, if you look at last year, we did CNY326.8m in revenue in the summer of 2005.

But in the second quarter of 2006, which is the quarter we're entering now, last year we only did CNY127m in revenue.

We lost CNY8.7m that quarter.

So it should typically be our slowest quarter.

Great.

Thanks for the color.

Again, congratulations.

Thank you.

Thank you.

And your next question comes from the line of [Kit Yung] with Goldman Sachs.

Please proceed.

Hi Michael.

Hi Louis.

Good evening.

Hi.

Hi.

A couple of quick questions, first starting with G&A expenses.

Looked like G&A has been flat year on year.

Just trying to understand.

I understand that the full-time teaching expense is going through the G&A line.

The reason it's flat on [ex-SBC] basis, is it because the teaching expenses have been allocated to somewhere else, or has there been something else that offset the teaching expenses?

Good question, Kit.

I think we basically put in system -- we put some tight cost controls into place.

And there is no -- whether there's offset, we didn't move the teaching expenses anywhere else.

So it's basically apples to apples year over year.

We basically held expenses in line.

Last year we had -- we were in a rapid expansion phase and we were opening a headquarter building.

So our expenses were probably higher than normal last year.

And this year we made a special conscientious effort to control costs in our first fiscal quarter.

And so you can see also that from the G&A expense side that as we grow our revenue, our expenses on the sales and marketing and G&A side don't necessarily increase with revenue.

And that shows you the leverage of our business model.

Okay.

I see.

So is that what we should expect on a margin basis going forward?

Is that something you think would creep up quicker over time?

I think this year was exceptional.

This quarter was exceptional because of the high revenue base.

I think we will continue to control costs.

However, you will see G&A expenses go up over time because we're opening new schools.

So it's inevitable as our headcount increases and our G&A will increase, but revenue should offset that.

Okay.

Great.

Second one is a related question.

Would you mind giving us what the total full-time teacher headcount and the part-time teacher headcount is this quarter?

Yes.

During the quarter, our full-time teachers went down actually 37 from 907 in Q4 of '06, down to 870.

And our part-time teachers went up from 837 teachers at the end of Q4 of '06, which is May 31, up to 1,067 teachers, an increase of 230.

So our net teacher increase actually went up to 1,937 from 1,744.

So we almost had a -- we had 193 teacher increase.

And that's typical during our summer periods because, if you think about it, we opened seven new schools and it's also our busiest time.

Okay.

The reason for the decline in the full-time teachers is because --?

Usually it's because of the seasonality of our business.

It's cost effective for us to hire part time teachers actually.

That's one of the two ways that we were able to sort of offset the seasonality.

One is to pay teachers on a first-class-taught basis.

And the second way is to rent temporary facilities during the summer quarter, which is our peak season.

That way we don't incur the fixed costs of those buildings and facilities for the rest of the year.

Have you seen this trend of teacher's turnover increasing, being flat or has it been normal?

It's been normal as far as.

It's very normal actually.

Okay.

We do expect turn over of 15 to 20% in a year.

We're finding it actually, that we're able to hire as we become better known and as our -- as we expand we're finding that we are able good quality teachers, as demonstrated by the last quarter.

Great thank you.

That's all I have.

Thank you.

Thanks Kim.

And your next question comes from the line of Sean Quek with Credit Suisse.

Please proceed.

Hi Michael, hi Louis.

Hey Sean how are you?

Good, good, just two quick questions.

The first one is on the CapEx, clearly you've added seven schools and that's all translated into about [$4m] in the first quarter.

Can you give me some color on how much you expect to spend in the rest of the year?

Yes, that's a great question.

On the CapEx side there was a -- the actual CapEx was higher than for the quarter itself.

And the reason is that we recognize CapEx on a cash-paid basis.

So, actually $2m or CNY15m of the $4m in CapEx, almost half is attributable to the Yangzhou, phase three project payment.

So, it's actually constructed in Q4 of last year.

So it was done by May 31, before this quarter.

But because of timing differences, the payment was made during the summer and so therefore it shows up as our Q1 CapEx.

And to answer the second part of your question, really there's the [two] CapEx open the seven schools is actually close to the portions for the three months is actually about $2m.

So it's in line with what we had projected.

The -- going forward we expect that for the rest of the year, to not spend more than $3m on CapEx.

So, it hits the $5m target that we had given on the road show.

Okay.

And that of course relates to our organic growth and strategic move would change that.

So that's relating to our existing business.

Okay.

Just following up on the seven schools.

Can you give some guidance in terms of when those schools have start operation, i.e. should we expect some of the revenues from the first quarter to have come from the seven schools?

Yes, the seven schools together combine for almost CNY2m in revenue.

They were all opened over the course of the summer.

Okay, thanks.

Yes.

[OPERATOR INSTRUCTIONS].

And your next question comes from the line of Wendy [Wilde] with Evolution Securities.

Please proceed.

Good morning.

I have two questions.

One is about the market competitive landscape.

Could you tell me what the market share of New Oriental in the English language training market, and how do you view the competition from the English First and Wall Street English?

And my second question is regarding your guidance.

You achieved a 31% year-over -year growth in this quarter, you're looking for just a lower year-over-year growth about 17 to 24% for the next quarter.

What's the reason for that lower guidance?

Thank you Wendy, excellent question.

First the market share, the best we can tell from market data is that the English language training market in China is about $2.3b.

And sine our revenue is about 100m this year.

We're about 4 to 5% of the total market from that statistic.

Now, we're growing at -- but the market's growing at 4 -- 4.5%, we're growing at double that.

So, we're growing at more than 25% at least in the last couple of quarters.

And so that answers our market share number.

Second question relating to -- yes to companies English First and Wall Street English.

Well we really do think that they are our strong competitors in the English learning areas.

Wall Street [inaudible] are high earnings strategy and they're only focused on that areas.

And we went into that area about two years ago and we are actually fighting market shares from Wall Street.

And at Wall Street we don't think that they have their resources to come down to our like English training [truly in the cities] for middle school, high school students.

I'm sure looking to the future, we are somewhat confident that we can have more shares from high earning English training in China.

And also English First is -- they have also kids English and [inaudible] English training, but their market share in China is somehow smaller, much, much smaller compared to our market share in China.

So, we think that they're doing pretty well, but we think that our revenues and profits are far, far ahead of them.

And also we think that we have the ability to have more market shares in China.

So, you haven't seen any big competitors in this market yet?

It's a very fragmented market.

So, there's no one that we know of that's comparable to our size.

And so I think there's -- I see a statistic that so far as many 30,000 English Language schools in China, but no one with a nationwide percent and this kind of nation -- national scale and the enrollments that we have.

As to your other question Wendy, relating to our projections for Q2. 31.4% is a really high number for us.

And Q -- this summer was basically a very, very strong quarter.

It was the strongest in our history and so what we're concerned about is typically, is that let's say on in Q2, because we may have borrowed some revenue from Q1 as many, many students came to our courses this summer.

And secondly Q2 is typically a very hard to project because it's the time when kids go back to school and so not as many kids will enroll in test preparation and language classes while they're enrolled in their formal education program.

So, we tend to err on the side of conservatism and in -- we've guided that we can grow 20-24% a year on the top line and the summer was exceptional.

I have another question about the balance sheet.

It seems like your deferred revenue reduced by over CNY100m this quarter.

What's the reason for that?

Yes, deferred revenue is a leading indicator.

So, if you look at deferred revenue, it's always going to be the highest at the end of Q4, the May 31 balance sheet, because that's revenue that's actually paid.

Remember our business model is a very strong one as far as collection.

We collect cash up front, so we get the payment when students register for their courses, usually months ahead of time they actually enroll on the courses.

So, before the courses start they will have paid us.

So, if you look at in Q4 every year we'll have the highest deferred revenue number.

Because those are the students who pay by May 31, to enroll in our summer classes.

So, they're afraid of being -- of the classes filling up, so they enroll ahead of time they sign in summer.

Now Q2 is the opposite, Q2 is our slowest quarter, so during the summer not as many students will enroll for Q2 because it's our weakest quarter.

So the deferred revenue number, which means prepaid revenue from students in the future, basically will decline.

So that's a normal -- in fact last year at the end of Q1, our deferred revenue was only 119m.

So, it's already a 15% increase year-over-year.

Interesting.

Thank you.

Thank you.

And your next question comes from the line of Brandon Dobell with Credit Suisse.

Please proceed.

Morning guys.

Hey Brandon.

Hi.

Couple of questions for you.

As you opened the schools, especially the ones in the tier two cities, did you see any difficulties finding teachers or are you finding any wage pressures, either for full time of part time teachers in your tier one or tier two cities right now?

Yes, mostly we focus our business on tier two schools, kids English training.

That means that we don't really need many teachers in adult English and like the test preparation training.

You see when we open test preparation courses or our are Adult English training courses in tier two schools, we send teachers from tier one schools there from big cities to teach there periodically.

So, it's somehow actually easier to find kids' English teachers from local areas.

Because with kids' English teachers, usually they needn't have a very high English ability, but they should have like a very nice pronunciation and [other] English ability.

That's easier to find because most of the kids teachers are [female] teachers, are women teachers.

So they stay in their local villages usually they do not move.

So, actually it's easier for the tier two schools to get a stable and continuous growth in this area actually.

We don't get much complaint about tier two school teachers because usually the kiddies love their teachers very much.

The only thing is that with the tier two schools -- that the revenue of tier two schools will grow at the beginning somewhat slower than tier one schools because when you find kids to come to tier two schools to study, the kids come one by one, not group by group.

As far as your wage pressure question Brandon.

Actually as we entered tier two cities the wages are actually less right, on a full time basis.

Part time basis we usually pay them by the courses part anyway.

So anyway so it will be a fixed dollar rate per set course.

So we haven't seen significant wage pressures yet this year.

Okay perfect thanks.

And then I think when we talked previously, one of the issues that we had kind of gone through was the potential for you guys to borrow students from Q2, meaning seeing great demand, but perhaps the students that had -- that would decide to go earlier rather than take a course, let's say now for example.

Do you think that's the case here, do you think part of Q1's strength was because you borrowed students?

Or was it just a great quarter and you're not sure about that phenomenon this time around?

I think to be -- to air on the side of conservatism, the answer is we don't know yet.

Okay.

We are seeing -- we're seeing good growth in Q2 but it's not -- the quarter's not done yet.

So I think, as you know, to air on conservatism we will guide it at 20% at the mid point because of that external factor that you just mentioned that we may end up borrowing from Q1 already.

Usually the pattern happens every year, but this year somehow this was stronger because many of the universities -- the university students come from high school so they're first year freshmen, then they get enrolled in a university.

Before they go into university to register to study they sometimes they just come to New Oriental to study English for one month or two months, so that they get fully prepared for their university life.

Because for the first or second month in university life they usually have to attend a lot of other activities.

But we also can see that the Q2, it is normal that students also come into our system to study and the revenue is growing somehow reasonably.

Okay, okay, and then final question.

As you think about the move into the tier one cities for new learning centers or for new schools, have you seen any evidence of price increases in your rental costs?

I know some areas in China right now are pretty strong from a commercial real estate perspective.

Any concerns there as you extend the network that you start to see your rent costs go up?

You mean sort of the cost up like, when we lease our buildings and that the price go up?

Yes.

It's actually not very apparent because -- for this year actually, generally speaking because of the control of policies of the Chinese government, the total price of the buildings for lease are actually it's relatively cheap.

Because even there are sometimes, in some cities, it's going down in costs.

And then usually when we lease a building for our teaching, we usually lease it for five years or ten years in that role, usually at the same price every year.

So, we -- when we open new learning centers we calculate that if we would have enough students to go to that place, we began to open a learning centre.

So the total cost of buildings in our system is actually not very much, not increased not very much I'm sure.

Okay.

And then the good thing also Brandon, is because we're moving into the cities that are not as -- we've already captured the biggest cities, which are -- you look to the hottest.

And we've locked in long-term leases there and so in the smaller cities that we will expand in there's not as much real estate inflation or lease price inflation.

Okay.

Great thanks a lot guys, appreciate it.

Thanks Brandon.

And your next question comes from the line of James Mitchell of Goldman Sachs.

Please proceed.

Hi good morning and good evening, two quick questions.

First, I think you gave year-on-year growth rates for kids' English, high school English and test prep but I missed the year-on-year growth rate for Adult English.

I'm not sure whether you can give that?

Yes I can give that.

Adult English on a revenue basis James, the increase was over 13% year-over-year.

And on a student enrollment basis, it was over 6.5% year-over-year.

So it was about almost 90,000 students over the summer.

Okay and the reason why the student enrollment crisis in the single digits rather than double digits for adult enrollment is because in the tier two cities you're not pushing adult English as hard as kids and high school English?

Correct and also kids and high school English is off a smaller base from [last year].

Adult English is already off a 250,000 student base and -- but that's correct as we move into, as Michael mentioned, in the tier two cities, we're really pushing High School and Kid's English because there's not as many universities in the tier two cities.

Okay excellent, and my.

Because yes.

Sorry.

So you're correct the drivers are in the English language training side it's kids, [top] English, high school English and then on the test prep side it's overseas test prep.

Okay, excellent and the -- did you say 50% growth rate not 15% growth for overseas test prep?

Correct, 50%.

Is there anything happening on the demand side that's generating that?

The U.S. issuing more visas or?

Yes that is one factor, yes that's one factor.

The student growth actually was -- well I wouldn't say 'only'.

It was exceptional, it was over 28% year-over-year.

The revenue growth was 50% and you're absolutely right one of the factors is that this year the U.S. made it easier for students coming from foreign countries to get visas.

And the second effect also I think for our summer is that there is a contemplated change in the [Topo] exam next year.

But some students who were comfortable with the old exam wanted to get it done early.

Yes, another factor is that more Chinese families realize that they want to send their kids to study for university at the overseas universities.

Usually like before, people only send their kids to study for graduate schools.

So, this year we can see a growth in number of students that graduate from high schools and study test preparations and go to overseas to study.

The SAT is our fastest growing test, albeit off a very small base.

So, it is just as Michael mentioned, students -- if families can afford it they want their kids or the kids want to go overseas directly to college instead of waiting for graduate school.

Okay and then my second question, it looks like you've frontloaded your new school openings in sort of fall.

Since you generate most of your revenue in the summer, I'm just curious as to why you frontload the school openings into the fall rather than wait until the winter or the spring?

Yes, actually in the spring, James, we actually opened three schools as well.

They were just loaded -- they were just counted in the '06 schools.

Because they had opened before May 31.

So we actually, in this calendar year we've opened more than 10 schools.

Second is that you're correct, we are trying to move the school openings earlier in the year to capture the summer but because our group is so busy all year round, sometimes the school openings will get pushed back for various reasons.

But we cannot start opening schools because we have tier two schools usually we focus on kids' English and the middle school English training.

For kids' English, but it's kind of not so much seasonality factors in it, so for tier two schools it's actually kind of the same here, also any month of the year.

But for tier one schools the best is that you open before the summer.

But if you are not again prepared for that the best is that you delay it until the fall because you don't have the teachers waiting for students and at the summer most [inaudible], sometimes they cannot find better teachers in the city, it's ruined at least for a whole year.

We're basically opening schools all year round.

Okay, thank you.

And your next question comes from the line of Justin [Adzuka] with First [Q].

Please proceed.

Good evening gentlemen.

I'm actually -- my question was with regards to capital expenditure and has already been answered.

So congratulations on a great quarter.

Thank you Justin.

Thank you.

Thank you.

Next question comes as a follow up from the line of Mark Marostica with Piper Jaffray.

Please proceed.

Hey guys just a couple of follow ups here, and I don't want to get ahead of ourselves but if we look at fiscal '08, I'm curious as to whether there's anything unique from a seasonal perspective or anything unique with the business in Q1 of fiscal '07, that when we try to look at comparables, year-over-year that we might need to be aware of in our modelling exercises?

Nothing other than what's already been mentioned Mark, which is that there is some -- the U.S. did open up visas this year and so there was a stronger demand than in the past couple of years.

And secondly because of the change in the [Topo] exam, there's some uncertainty surrounding that test next year, as the new exam gets rolled out.

So those are the only things.

But the demographic demand will increase.

As Michael mentioned, we expect more and more high school students to be taking the SAT out of China, and SAT trying to go over abroad for college directly.

And second, is we've shown on the roadshow presentation, the demographics are in our favour. 10 to 19 year-old people in China, is the highest bars of the demographic table, kids [inaudible] 5 to 29.

And those are the ones in college and so there's an increasing demand for Test Preparation and overseas study.

So the demographics actually works in our favour.

Is another point of overseas test prep, I'm curious as to what the competitive landscape looks like, who you see as your biggest competitor there, perhaps similar question to the other questioner on the English language market?

Thank you, actually we have a very high market share in United States' test preparation courses like [Topo] GIE, GMAP and SAT.

We occupy almost more than 80% of the market share in these areas.

And a lot of test preparation for overseas -- overseas test preparation courses like IOS was delivered by U.K.

We occupy about not exact number, but maybe a little less than half portion of the market share in this area.

So we have competitors, like in Beijing we have a school called [inaudible] that deliver IOS, they occupy almost the same amount of market shares with us.

But we're trying to find better teachers and they're doing research in this area.

And we also have cooperated with Cambridge Press as to publish their books in IOS so that maybe we can take advantage of this.

Great, one last follow up, your housekeeping item.

Your D&A in the quarter?

D&A for the quarter was CNY13.5m and that should be relatively consistent going forward.

It relates to the four buildings that we own.

It should not increase unless we change our business model.

Thank you.

Ladies and gentlemen this now concludes the question and answer session.

At this time I will turn the call over to Michael Yu.

Please proceed.

Thank you ladies and gentlemen we really appreciate it and again thank you for joining us today.

If you have any further questions please do not hesitate to contact myself, Louis and any of our investor relations representatives.

Thanks a lot, good morning and good evening again.

Thank you for your participation in today's conference.

Ladies and gentlemen this concludes the presentation you may all disconnect and have a good day.