Company Reports

We raise our fair value estimate for no-moat New Oriental to USD 62/HKD 49 per share after lifting our revenue growth assumptions. We think the market has been too optimistic about New Oriental’s growth and margin trajectory; the shares fell in reaction to slower growth and flat margin but still look expensive. Revenue in the company’s fiscal 2024 third quarter (ended February) beat the upper end of guidance by 10%, but management expects 28%-31% revenue growth in the fourth quarter, a meaningful deceleration from 36%-60% in the previous three quarters. In addition, non-GAAP operating margin was flat in the third quarter despite 60% revenue growth year on year, raising concerns about the margin trend.

After terminating its K-9 academic tutoring in 2021, New Oriental identified a few new business initiatives, such as nonacademic tutoring and intelligent learning systems and devices. We are positive on these initiatives given New Oriental’s expertise in after-school tutoring and curriculum development. The new businesses accounted for only about 17% of revenue in fiscal 2023 but growth is robust. We project a 27% revenue contribution by fiscal 2028.

New Oriental's fiscal 2024 second-quarter (ending November 2023) result beat our expectation. Revenue in the quarter increased by 36% year on year, 8% higher than the upper end of management guidance. In addition, management guided for revenue to grow 42%-45% year on year for the third quarter. After revising our revenue growth assumption to 35% from 27% for 2024, we raise our 2024 revenue forecast to USD 4.0 billion from USD 3.8 billion, and our net income forecast to USD 353 million, from USD 328 million. We also raise our net income estimates by 16%-19% for fiscal 2025 to 2028. As a result, we increase our fair value estimate to USD 51 from USD 47. New Oriental’s share price closed 49% above our new fair value estimate on Jan 24. We think investors are overly optimistic with its growth and margin outlook. To justify the share price, we think New Oriental’s revenue needs to grow at 25.0% CAGR from fiscal 2023 to 2028 while adjusted operating margin expands to 16.8% by 2028 compared with our forecast of 14.5% revenue CAGR and 13.8% adjusted operating margin.

After terminating its K-9 academic tutoring in 2021, New Oriental identified a few new business initiatives, such as nonacademic tutoring and intelligent learning systems and devices, etc. We are positive on these initiatives given New Oriental’s expertise in after-school tutoring and curriculum development. The new businesses accounted for only about 17% of revenue in fiscal 2023 but growth is robust. We project 30% revenue contribution by fiscal 2028.

After terminating its K-9 academic after-school tutoring in 2021, New Oriental identified five new business initiatives: 1) nonacademic tutoring; 2) intelligent learning systems and devices; 3) study tours and research camps; 4) educational materials and digitalized smart study solutions; and 5) exam preparation courses designed for students with junior college diplomas to obtain bachelor’s degrees. Among the five initiatives, we think the first two initiatives present decent opportunities, given New Oriental’s expertise in after-school tutoring and curriculum development. The new initiatives collectively accounted for only about 17% of revenue in fiscal 2023 but growth is robust. We expect these initiatives to contribute 32% of revenue by fiscal 2028.

New Oriental's fiscal 2024 first-quarter (ending August 2023) result was exceptionally strong, with revenue up 47.7% year on year, 9.4% higher than the upper end of management guidance. Besides, the operating profit margin jumped to 18.6% from 10.5% in the first quarter of fiscal 2023, driven primarily by positive operating leverage as general and administrative expense ratio fell to 28.9% from 34.4%. After factoring in the better-than-expected first-quarter figures, we raise our 2024 revenue forecast to USD 3.8 billion from USD 3.7 billion, and our net income forecast to USD 328 million, from USD 285 million. In addition, we lower our cost of capital assumption to 13% from 15.5% to reflect lower exposure to regulatory risk as its business diversifies away from academic tutoring.

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.

After terminating its K-9 academic after-school tutoring in 2021, New Oriental identified five new business initiatives: 1) nonacademic tutoring; 2) intelligent learning systems and devices; 3) study tours and research camps; 4) educational materials and digitalized smart study solutions; and 5) exam preparation courses designed for students with junior college diplomas to obtain bachelor’s degrees. Among the five initiatives, we think the first two initiatives present decent opportunities, given New Oriental’s expertise in after-school tutoring and curriculum development. The new initiatives collectively accounted for about 17% of revenue in the fiscal quarter-ended February 2023. We expect these initiatives to contribute 23% of revenue by fiscal 2027.

New Oriental’s fiscal third-quarter (ending February 2023) results beat management guidance and our expectations thanks to strong demand for high school tutoring and overseas-related business. We believe high school tutoring benefited from a friendlier regulatory environment and overseas-related business was helped by pent-up demand. We think the positive trend will carry into fiscal 2024. As such, we have raised our revenue forecast to USD 2.96 billion in fiscal 2023 and USD 3.56 billion in fiscal 2024 from USD 2.76 billion and USD 3.31 billion, respectively. We have also increased our earnings estimates to USD 186 million in fiscal 2023 and USD 244 million in fiscal 2024 from USD 122 million and USD 177 million, respectively. As a result, we raise our fair value estimate to USD 36/HKD 28 from USD 32.50/HKD 25.50.

New Oriental’s revenue in its fiscal second quarter beat management's guidance, but operating margin declined sharply quarter on quarter. Besides seasonality and lockdowns, we attribute this partly to Koolearn, which recorded strong sequential revenue growth but declining margins, based on our estimate. We raise our revenue forecast for the year ending May 2023 to USD 2.76 billion from USD 2.6 billion, but our earnings estimate is largely unchanged at USD 122 million. The share price fell 12% overnight, which we attribute to disappointment on the part of some investors who had previously been too aggressive in their assumptions for Koolearn’s profit trajectory. We keep our fair value estimate at USD 32.50/HKD 25.50, and we consider the shares fairly valued.

We've raised our fair value estimate for New Oriental Education to USD 32.50/HKD 25.50 from USD 31.50/HKD 24.50 after fiscal 2023 first-quarter results beat company guidance and our expectation. The core businesses recorded steady growth year on year while new business initiatives gained decent momentum sequentially. In addition, we estimate online education subsidiary Koolearn delivered exponential revenue growth and impressive profitability in the quarter. We think New Oriental is on track to meet our USD 2.6 billion full-year revenue forecast despite the foreign-exchange headwind. After fine-tuning our model, we've raised our fiscal 2023 net income forecast to USD 121 million from USD 52 million. This translates to a 4.6% net income margin, up from 2% in our original forecast. After a 28.3% share price gain overnight, the shares closed at about 17% below our fair value estimate. We consider the shares to be fairly valued, given our suggested risk buffer.

After terminating its K-9 academic after-school tutoring in 2021, New Oriental identified five new business initiatives: (1) nonacademic tutoring; (2) intelligent learning systems and devices; (3) study tours and research camps; (4) educational materials and digitalized smart study solutions; and (5) exam preparation courses designed for students with junior college diplomas to obtain bachelor’s degrees. Among the five initiatives, we think the first two initiatives present decent opportunities, given New Oriental’s expertise in after-school tutoring and curriculum development. The new initiatives collectively accounted for about 16% of revenue in the fiscal quarter ended August 2022. We expect these initiatives to contribute 18% of revenue in fiscal 2023 and about 28% by 2027.

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.

After terminating its K-9 academic after-school tutoring in 2021, New Oriental identified five new business initiatives: 1) nonacademic tutoring; 2) intelligent learning systems and devices; 3) study tours and research camps; 4) educational materials and digitalized smart study solutions; and 5) exam preparation courses designed for students with junior college diplomas to obtain bachelor’s degrees. Among the five initiatives, we think the first two initiatives present decent opportunities, given New Oriental’s expertise in after-school tutoring and curriculum development. The new initiatives collectively accounted for more than 10% of revenue in the fourth fiscal quarter-ending May 2022. We expect these initiatives to contribute more than 20% of revenue in fiscal 2023 and about 35% by 2027.

We keep our fair value estimate for New Oriental Education, or EDU, at USD 21.50. EDU’s losses of USD 122 million in the third quarter of fiscal 2022 were driven by investments in new business initiatives. This is well expected. On the positive side, EDU’s cash and cash equivalents, term deposits and short-term investments totaled USD 4.4 billion, which provides ample room for exploring new business opportunities. After deducting the accrued expenses, accounts payable, tax payable, and senior notes, we estimate a net cash position of USD 3.6 billion. The current market cap is only about USD 1.7 billion, or USD 1.9 billion lower than its current net cash position. Operating cash outflow in the quarter was about USD 235 million. At the current run rate, it would take another eight quarters of cash outflow to close the gap between market cap and net cash position. This looks overly bearish. That said, the share price could remain volatile due to limited visibility.

New Oriental Education, or EDU, is a large-scale leading provider of private tutoring in China. EDU offers a diversified portfolio of educational programs, services, and products to students in different areas. Not only does EDU offer K-12 after-school tutoring, but EDU also offers other test preparations for both overseas and domestic examinations. In nonacademic fields, EDU offers adult English and other languages, and it also provides services in vocational training, such as corporate training, marketing, accounting, human resources, IT and PRC Bar. EDU has been able to raise its fees via new students or new programs to cover rising costs, driving an improving margin as utilization and operational efficiency continues to improve. In the last fiscal quarter, EDU was able to raise prices of different courses. The hourly blended average selling price, or ASP, (cash revenue divided by total teaching hours) increased by approximately 3% to 7% year over year in yuan terms.

We maintain our fair value estimate for New Oriental Education at USD 2.11. As anticipated from Beijing’s clampdown on the China education sector, the firm’s bottom line was hit hard with a net loss of USD 875.9 million for the first half of fiscal-year 2022 (ending November), versus the net profit of USD 228.6 million over the same period in 2020. This is despite fiscal 2022 first-half revenue rising 5% year over year to USD 1.97 billion. The net loss is largely due to restructuring charges as the firm moves its business to focus on non-academic offerings. The losses are in line with our assumptions that these restructuring costs will continue to be reflected in the forthcoming three quarters and should also impact fiscal 2023 income. Because of the change in business, we forecast fiscal 2023 sales to decline 41.8% year on year. On the positive side, the firm’s cash and cash equivalent reached a total of USD 1,027 billion.

New Oriental Education, or EDU, is a large-scale leading provider of private tutoring in China. EDU offers a diversified portfolio of educational programs, services, and products to students in different areas. Not only does EDU offer K-12 after-school tutoring, but EDU also offers other test preparations for both overseas and domestic examinations. In nonacademic fields, EDU offers adult English and other languages, and it also provides services in vocational training, such as corporate training, marketing, accounting, human resources, IT and PRC Bar. EDU has been able to raise its fees via new students or new programs to cover rising costs, driving an improving margin as utilization and operational efficiency continues to improve. In the last fiscal quarter, EDU was able to raise prices of different courses. The hourly blended average selling price, or ASP, (cash revenue divided by total teaching hours) increased by approximately 3% to 7% year over year in yuan terms.

We have lowered our fair value estimate of New Oriental Education, or EDU, to USD 2.11 from USD 2.42 in light of the company’s cessation of tutoring services related to academic subjects to students from kindergarten through grade nine, or K-9, academic after-school tutoring services (or AST services) at all learning centers across China by the end of 2021. As a result of the elimination of these services, EDU also laid off 60,000 employees; a seismic reduction of the more than 88,000 full-time employees and about 17,000 contract teachers and staff it reported as of May, according to its latest annual report. Given the lack of visibility into post-restructuring cash flows, we see limited upside catalysts in the near term. EDU expects to host its semiannual analyst meeting before the end of February 2022.

New Oriental Education, or EDU, announced on Nov. 11, 2021 that in compliance with the Chinese government to alleviate stress for students in mandatory education and after-school tutoring (also known as AST services) opinion and applicable rules, regulations and measures, it plans to cease offering tutoring services related to academic subjects to students from kindergarten through grade nine (also known as K-9) at all learning centers across China by end-2021.