New Oriental Earnings: Strong Revenue Growth but Rising Expense a Concern; Shares Overpriced

New Oriental’s fiscal 2023 fourth-quarter (ending May 2023) revenue beat management guidance but adjusted net income missed the Refinitiv consensus. We suspect there was a large hike in selling and marketing expense in East Buy (formerly Koolearn). Meanwhile, the new businesses are bearing fruit and are on track to hit mid-double-digit revenue growth in 2024. Demand for overseas-related business and high school tutoring also remained strong, and we think the trend will carry forward to fiscal 2024. As such, we raise our 2024 revenue forecast to USD 3.75 billion, from USD 3.56 billion, and our net income forecast to USD 285 million, from USD 244 million. Our fair value estimate remains USD 36/HKD 28. New Oriental’s share price gained more than 40% from its June 2023 low and is now 43% above our fair value estimate. We think investors are too optimistic about its growth and margin potential.