New Oriental Earnings: Fiscal Q3 Beats Expectations; Our Fair Value Rises on Better Outlook

New Oriental’s 09901 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.

High school tutoring revenue in the quarter was 10.2% higher than our forecast. In addition, management guided for double-digit year-on-year growth for the fiscal fourth quarter and 2024. We believe the positive guidance is attributable to a friendlier regulatory environment. As such, we have increased our fiscal 2023 revenue forecast by 9.6% and adjusted our fiscal 2024 growth estimate to 12% from 3% for high school tutoring. Management guidance for overseas-related business is consistent with our expectations, but the demand recovery came earlier than expected. As a result, we increase our fiscal 2023 revenue forecast by 9.5% for overseas-related business.

East Buy (previously Koolearn) has been the focus of investors since June 2022. We estimate East Buy’s earnings declined by 20% quarter on quarter, contributing only about 20% of New Oriental’s earnings. Management attributed the decline to higher investments, but East Buy’s gross merchandise value has been declining over the last three months. While this may be disappointing to some investors, we think it should be offset by the better outlook for New Oriental’s core businesses.