Is IDP Education Pty Ltd the next market darling?

What do A2 Milk Company Ltd (ASX: A2M), Blackmores Limited (ASX: BKL) and Bellamy’s Australia Ltd (ASX: BAL) have in common?

It isn’t that all three stocks posted triple-digit returns in 2015, but the fact that they are all focused on one key market – China. IDP Education Pty Ltd (ASX: IEL) is relatively unknown, but early indications suggest that its focus on China may make it a household name by the end of 2016.

The Chinese economy

For years, Australian companies have profited from the Chinese economy by selling products to China. It all started with the onset of the mining boom where BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) provided hard commodities to help industrialise China’s urban cities.

Through the forces of globalisation, Australia subsequently became more reliant on China, leveraging its geographic proximity and free trade agreements to start selling soft commodities such as agricultural products and infants’ milk powder.

With China now said to be completing its transition to a consumer-driven economy (as opposed to manufacturing driven), Australia’s next opportunity lies in selling tourism and professional services to China. Education is one of those professional services and currently is Australia’s fourth largest export industry with a value of $18 billion. This figure is poised to grow with increased demand from Asia, which is where IDP Education fits in.

The company

IDP Education was formerly 50% owned by SEEK Limited (ASX: SEK). It listed on the ASX in December 2015 at an offer price of $2.65 per share as part of SEEK’s exit strategy and operates in the higher-education sector. IDP Education is currently 50% owned by Education Australia (a company which is, in-turn, is wholly owned by 38 Australian universities), demonstrating strong industry ties to tertiary education bodies.

IDP Education performs three key functions; student placement services, IELTS testing and English language testing.

Student placement services

Student placement agents, such as IDP Education, help universities attain their quota of international students by marketing to prospective students seeking to leave their country of origin and move to another country for the purpose of study. IDP Education assists international students to enrol into foreign universities by providing course guidance and information as well as assistance with applications, immigration forms and accommodation. In return, education institutions such as universities provide a commission fee to IDP Education for their successful placements. These fees act to provide a solid revenue stream with pro-forma 2014 revenue sitting at $57.3 million from placements.

IELTS testing

IELTS is a high-stakes English language test used to demonstrate proficiency in the English language for legal or other official requirements. Tertiary bodies often require high-stakes English language testing as a pre-requisite to admission. IELTS is co-owned by IDP Education, the British Council and Cambridge Assessment and is currently the preferred test by the Australian Government (and various educational bodies). IDP Education competes with its co-owners to provide IELTS testing in Australia, but it still remains the group’s biggest contributor to earnings. In 2014, full-year revenue was $175.8 million from IELTS testing, representing an 18.2% increase from prior year.

English language teaching

Finally, as part of a full-service offering, IDP Education owns and operates English language schools in South East Asia to provide a range of courses from general English to business and academic English. This is the smallest contributor to group earnings with 2014 revenues of $13.5 million. However, the company plans to increase profitability in 2015 and use its existing network to boost earnings within this division.

Foolish takeaway

According to IDP Education’s IPO prospectus, “worldwide growth in demand for tertiary education . . . is likely to continue to be driven by major emerging countries such as China, India and Indonesia” with 53% of international students currently coming from Asia, globally. This makes IDP Education well positioned in a fast-growing industry.

Time will tell whether IDP Education becomes a big hit. However, with the company already commanding a strong position to IELTS testing in Australia, and positive industry dynamics providing a tailwind to earnings, IDP Education is definitely one stock to watch this year.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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