Introduction

New Oriental Education & Technology Group (EDU), a frontrunner in China’s educational services market, has released its Q2 FY25 financial results. The report, prepared by UOB Kay Hian, provides a deep dive into the company’s performance, highlighting its revenue streams, profit margins, growth projections, and investment recommendations. This detailed analysis focuses on every critical aspect of the company’s operations and financial health.

Company Overview

New Oriental Education & Technology Group offers a diverse range of educational services encompassing foreign language training, test preparation courses, K-12 after-school tutoring services, and online courses in China. The company is positioned in the Consumer Discretionary sector and has a market capitalization of \$10.07 billion, with a total of 165.5 million shares issued. The stock trades under the ticker symbol “EDU US” on Bloomberg.

Q2 FY25 Results Summary

For Q2 FY25, New Oriental Education reported revenue growth of 19% year-over-year (YoY), amounting to \$1,039 million. While this was in line with consensus estimates, non-GAAP net profit fell short, reaching \$36 million, representing a 29% YoY decline. The net margin also contracted by 2 percentage points (ppt) YoY to 3%. Despite these challenges, the company maintains a “BUY” recommendation with a revised target price of \$80, reflecting a 31.5% upside from its current share price of \$64.80.

Key Financial Metrics

Below is a detailed breakdown of key financial figures:

• Revenue: \$1,039 million, up 19% YoY.
• Gross Profit: \$540 million, reflecting a 21% YoY increase. Gross margin stood at 52%, up 1ppt YoY.
• Operating Profit: \$19 million, marking a significant decline from \$293 million in the previous quarter.
• Non-GAAP Net Profit: \$36 million, down 29% YoY.
• Non-GAAP Operating Margin: 3%, representing a 3ppt YoY contraction.
• EPS: Non-GAAP diluted EPS fell to \$0.22 from \$1.60 in the previous quarter.

Revenue Breakdown by Segment

The company’s revenue growth was driven by several key segments:

• Overseas Test Preparation and Study Consulting: Modest growth of 21.1% and 31% YoY, respectively.
• Domestic Test Preparation for Adults and University Students: Resilient growth of 35% YoY.
• Educational Business Initiatives: Increased by 42.6% YoY, although slightly below the previously guided >50% growth.
• Non-Academic Tutoring: Offered in 60 cities, attracting 994,000 student enrollments during Q2 FY25.
• Intelligent Learning Systems: Adopted in 60 cities with 261,000 active paid users.

Margin Performance

Margins faced challenges during the quarter:

• Gross Margin: Improved slightly to 52%, up 1ppt YoY.
• Operating Margin: Declined 3ppt YoY to 3%, primarily due to a \$90 million loss in the tourism segment.
• Sales & Marketing Expenses: Increased by 32% YoY to \$199 million, attributed to capacity expansion in educational businesses.

Guidance for Q3 FY25 and Beyond

The company provided moderated guidance for Q3 FY25:

• Revenue: Expected to grow by 18-21% YoY to \$1,007.3-\$1,032.5 million. This is 2-3ppt below earlier forecasts.
• Segment Contributions: Overseas test preparation and consulting are expected to contribute 16% and 12% of revenue, respectively, while K-9 and high school segments are forecasted to grow by 40% and 20% YoY, respectively.
• Full-Year FY25 Outlook: Revenue is projected to grow 25% YoY, supported by growth in learning centers, which increased by 5% YoY to 1,140 as of Q2 FY25.

Risks and Challenges

The report highlights several potential risks:

• Margin Pressure: Resulting from heavy investments and restructuring in the overseas education business.
• Policy Uncertainties: Regulatory changes could impact operations.
• Geopolitical Tensions: US-China relations could affect overseas business performance.

Valuation and Recommendation

UOB Kay Hian maintains a “BUY” recommendation with a revised target price of \$80. The valuation is based on a sum-of-the-parts (SOTP) approach, implying a 19.4x FY26F PE, supported by a three-year EPS CAGR of 32%. The stock currently trades at 14.5x FY26F PE, below its five-year average PE.

Shareholder Returns

The company has actively returned value to shareholders:

• Special Cash Dividend: Approved a \$0.06 cash dividend per share/ADS, totaling \$100 million.
• Share Buyback: Repurchased 11.2 million ADSs worth \$542.8 million, representing 5.5% of the total market cap.

Conclusion

New Oriental Education & Technology Group continues to show resilience despite challenges in some segments. With diversified revenue streams, prudent cost management, and a robust growth outlook, the company remains a compelling investment opportunity. UOB Kay Hian’s recommendation to “BUY” underscores confidence in the company’s long-term potential.