New Oriental Earnings: Pent-Up Demand Drives Exceptional Revenue Growth and Margin Expansion

New Oriental’s 09901 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.

As a result, we increase our fair value estimate to USD 47/HKD 37 from USD 36/HKD 28. New Oriental’s share price gained more than 70% from its June 2023 low and closed 37% above our new fair value estimate on Oct. 25. To justify its current price, New Oriental needs to grow at 20% revenue CAGR versus our 13% CAGR assumption over the next five years, coupled with net margin expansion to 12% versus our current 9% assumption by fiscal 2028. We think investors are overly optimistic and overlook the demand normalization beyond 2024 and intense competition in its business.