New Oriental Company Valuation under Risk and Flexibility Based on Real Option Method

Zihan Zhang

Master's thesis

Abstract:

Since ancient times, education has been an important channel for a class transition. With the continuous development of social forms, people are constantly trying to deny the distinction between different social classes. However, from the data, the more developed regions pay more attention to education. It has also been widely recognized in China. Parents' investment in children's learning is far higher than that in other living materials. In the past 20 years, many educational institutions have sprung up, fighting in the blue ocean of extracurricular training. Evaluating the value of a developing educational training institution objectively is the focus of the economic field. In many educational institutions, we need to judge whether an institution has been overestimated or underestimated value. In fact, the education industry is not a new industry, but industry reform is urgent with the development of the Internet era. At present, educational institutions are more inclined to put forward slogans such as "knowledge sharing" and teach the whole country through a combination of online and offline methods. The traditional valuation method of discounted cash flow underestimates the value of flexibility, so we choose the real option method to evaluate the educational institution New Oriental. In this paper, the goal is to explore the value of New Oriental, an education and training institution in China, by using the method of real options. We collect data through public information. The annual report of New Oriental is the primary source of our data. We select the data information in the financial statements from 2017 to 2020. The second chapter of this paper briefly introduces the method of real option. A real option is a concept similar to a financial option, applying the financial option investment concept in the field of business investment. First of all, we use the cash flow method as an example to introduce the calculation of the traditional method and point out its shortcomings, and then introduce the basic parameters of real options. Next, we introduce several types of real options. Finally, we introduce how to calculate real options based on the binomial model and the Black-Scholes model. The third chapter introduces the basic economic situation and characteristics of New Oriental. First, we need to emphasize the particularity and importance of China's education market. Why Chinese parents are keen on out of school training, and how much they attach importance to their children's education. We use SWOT and Porter's five forces method to explore the market potential of New Oriental, and then use the general model analysis and financial ratio analysis method to calculate the profitability, management ability, solvency and liquidity of New Oriental. In the fourth part, according to the introduction of the second part, we use the real option method to analyze new Oriental. We discuss why it is more efficient to use real options and estimate parameters and input data. After that we use four scenarios to analyze expansion options, contract options and multiple options of New Oriental. Finally, we summarize the results of the application calculation in this part and analyze the results. Then, it puts forward some suggestions on applying real options, hoping to make a useful exploration on the development of the valuation system of the education industry.

Abstract:

Since ancient times, education has been an important channel for a class transition. With the continuous development of social forms, people are constantly trying to deny the distinction between different social classes. However, from the data, the more developed regions pay more attention to education. It has also been widely recognized in China. Parents' investment in children's learning is far higher than that in other living materials. In the past 20 years, many educational institutions have sprung up, fighting in the blue ocean of extracurricular training. Evaluating the value of a developing educational training institution objectively is the focus of the economic field. In many educational institutions, we need to judge whether an institution has been overestimated or underestimated value. In fact, the education industry is not a new industry, but industry reform is urgent with the development of the Internet era. At present, educational institutions are more inclined to put forward slogans such as "knowledge sharing" and teach the whole country through a combination of online and offline methods. The traditional valuation method of discounted cash flow underestimates the value of flexibility, so we choose the real option method to evaluate the educational institution New Oriental. In this paper, the goal is to explore the value of New Oriental, an education and training institution in China, by using the method of real options. We collect data through public information. The annual report of New Oriental is the primary source of our data. We select the data information in the financial statements from 2017 to 2020. The second chapter of this paper briefly introduces the method of real option. A real option is a concept similar to a financial option, applying the financial option investment concept in the field of business investment. First of all, we use the cash flow method as an example to introduce the calculation of the traditional method and point out its shortcomings, and then introduce the basic parameters of real options. Next, we introduce several types of real options. Finally, we introduce how to calculate real options based on the binomial model and the Black-Scholes model. The third chapter introduces the basic economic situation and characteristics of New Oriental. First, we need to emphasize the particularity and importance of China's education market. Why Chinese parents are keen on out of school training, and how much they attach importance to their children's education. We use SWOT and Porter's five forces method to explore the market potential of New Oriental, and then use the general model analysis and financial ratio analysis method to calculate the profitability, management ability, solvency and liquidity of New Oriental. In the fourth part, according to the introduction of the second part, we use the real option method to analyze new Oriental. We discuss why it is more efficient to use real options and estimate parameters and input data. After that we use four scenarios to analyze expansion options, contract options and multiple options of New Oriental. Finally, we summarize the results of the application calculation in this part and analyze the results. Then, it puts forward some suggestions on applying real options, hoping to make a useful exploration on the development of the valuation system of the education industry.

Keywords

Company Valuation under Risk and Flexibility Based on Real Option Method, New Oriental valuation, real options, option value, managerial flexibility.

Keywords

Company Valuation under Risk and Flexibility Based on Real Option Method, New Oriental valuation, real options, option value, managerial flexibility.

Language used: English

Date on which the thesis was submitted / produced: 23. 4. 2021

Thesis defence

• Date of defence: 31. 8. 2021
• Supervisor: Zdeněk Zmeškal
• Reader: Miroslav Čulík

VSB – Technical University of Ostrava

Ekonomická fakulta

Master programme:
Finance