We Raise New Oriental's Fair Value Estimate to USD 31.50 After a Fresh Look

We raise our fair value estimate to USD 31.50 from USD 21.50 after a fresh look at New Oriental Education. We are more positive about New Oriental’s business transformation now. We expect revenue to fall 16% year on year in 2023, or 39% from the 2021 level (the peak revenue year before regulatory changes decimated the industry), but recover to 85% of the 2021 level by 2027. We forecast New Oriental will turn profitable in 2023 with operating margin to reach 8% by 2027 as margin improves for the new business initiatives. New Oriental is trading at about 23% discount to our fair value estimate. The current market cap of USD 4.1 billion is the same as its net cash position as of May 2022. This looks too bearish given we expect New Oriental to generate positive free cash flow from 2023 onward.