Date: September 25, 2024
Broker: China Galaxy International Securities (Hong Kong) Co., Limited
Overview of New Oriental Education
New Oriental Education is expected to witness positive growth, driven by the demand for education services in China and its new initiatives. Despite weak consumption sentiment, the company is expected to deliver strong financial performance in the near term, particularly in its education-related businesses.
Revenue Growth and Forecasts
- In 1QFY5/25F, New Oriental’s overall revenue is expected to grow by 27% year-on-year (yoy) and by 31% yoy in FY5/25F.
- Key segments driving this growth include the high school academic tutoring business and new initiatives. The high school tutoring business is expected to grow by 30% yoy, contributing 25% of total revenue, while new initiatives are projected to grow by 50% yoy.
- The overseas test preparation and consulting business is forecasted to grow by 16% yoy in 1QFY5/25F and FY5/25F, despite slower revenue growth due to weak sentiment in overseas test preparation classes.
Margin Expansion
- The education operating margin (OPM) is expected to expand by 200 basis points (bp) yoy in 1QFY5/25F, driven by improved utilisation rates and economies of scale.
- In FY5/25F, the OPM is forecasted to grow by 100bp, with management expecting non-GAAP OPM to reach 18-20% in the longer term, compared to 10.2% in FY5/24.
- The margin improvement is attributed to the growing demand for education services, expansion of learning centres, and the rising importance of small group classes, which have higher gross profit margins than 1-on-1 tutoring.
Learning Centre Expansion
- As of 4QFY5/24, New Oriental had 1,025 learning centres, marking a 37% increase yoy and a 12.5% quarter-on-quarter (qoq) growth.
- The company plans to expand its learning centre capacity by 20-25% yoy in FY5/25F, continuing its growth trajectory.
Impact of East Buy
- East Buy, which is 53%-owned by New Oriental, contributed 21% of the company’s revenue and 14% of its non-GAAP net profit in FY5/24.
- In 1QFY5/25F, East Buy is expected to have a negative impact on New Oriental’s net profit due to one-off expenses related to key opinion leader (KOL) Dong Yuhui. However, this impact is expected to gradually reduce after the first quarter.
- For FY5/25F, East Buy’s contribution to New Oriental’s revenue and net profit is expected to decline to 16% and 7.5%, respectively.
Tourism Business Initiative
- New Oriental entered the tourism business in FY5/24, generating RMB380 million in revenue.
- The company projects tourism revenue to grow to RMB1.2 billion in FY5/25F, though it expects a net loss of RMB100 million. The business is forecasted to become profitable in FY5/26F.
Financial Performance and Targets
- New Oriental’s total revenue for FY5/25F is forecasted at US$5,631 million, a 30.5% increase from FY5/24.
- The company’s net profit for FY5/25F is projected to grow by 21.5% to US$376.2 million, with further growth expected in subsequent years.
- Non-GAAP net profit is forecasted to grow by 25% yoy in FY5/25F, driven by better margins and the fading impact of East Buy’s one-off expenses.
Financial Summary
- Revenue (FY5/25F): US$5,631 million
- Net Profit (FY5/25F): US$376.2 million
- Non-GAAP Net Profit (FY5/25F): US$476.2 million
- Operating Profit Margin (FY5/25F): 9.7% (non-GAAP)
- Gross Profit Margin (FY5/25F): 52.6%
- Target Price: HK$74.10 (up from HK$72.50)
Risks to Consider
Key downside risks for New Oriental include:
- A higher-than-expected negative impact from East Buy, which could drag down the company’s net profit.
- Increasing competition in the education sector that may affect overall margins.
- Potential failure of the company’s new initiatives, which are crucial to sustaining growth.
Investment Outlook
The broker maintains an “Add” rating for New Oriental Education, with a target price of HK$74.10, reflecting the company’s growth prospects and margin expansion. The company’s performance is supported by robust demand for education services in China and new business initiatives.
