New Oriental announced results for the second quarter of FY24 (2QFY24, 2023.9-2023.11), with revenue of US$870 million, up 36.3% year over year, and non-GAAP net profit of US$51 million, up 212.2% year over year. Revenue and profit have all exceeded our expectations, and the company's high performance growth continues to be driven by the literacy training business and study abroad business.
There was a strong increase in literacy education enrollment in the fall semester. Strong growth in new businesses, including the literacy training business (new businesses such as literacy and learning opportunities developed by the company after the “double reduction”), contributed to a high increase in the company's performance. 2QFY24's revenue was $209 million, up 72% year over year. Among them, the number of students enrolled in the literacy business increased by 64.8% year-on-year to 786,000, becoming the main revenue driver for the new business segment. Furthermore, the number of subscribers to the learning machine reached 180,000. Compared with the peak summer season of 180,000, there was no decrease, showing the characteristics of the off-season. Whether it is the rise in the literacy business or the continued boom in the number of active users in the learning machine business, it all stems from the reality that supply in the education and training market contracted after the “double reduction”, while demand did not decrease. We raised the number of annual literacy trainers to 2.67 million, an increase of about 65% year over year (up 10 percentage points from the previous forecast). We believe that the scale of literacy training will have a high growth rate because it will meet the needs of pre-“ double reduction” subject training. Meanwhile, New Oriental “double cut” the number of trainees the year before, by about 12 million. If it reaches the same scale, the current literacy business still has room for growth of about 4.5 times. Even if 12 million people are trained, their market share is only 6% (we estimate that the literacy business will require about 200 million training sessions per year). We believe that New Oriental's brand, teachers, teaching and research advantages will help the company's literacy business gain a higher market share.
Demand for study abroad businesses quickly recovered. With the elimination of the epidemic, the study abroad market showed signs of rapid recovery. Study abroad training and study abroad consulting services contributed US$191 million in revenue to 2QFY24, an increase of 43% over the previous year. In particular, the study abroad examination business resumed rapidly. On the one hand, it benefited from the recovery of the study abroad market. On the other hand, during the pandemic, foreign universities gradually relaxed temporary measures to use standardized language test results as a necessary reference during admissions, and the demand for international students recovered rapidly. We judge that the study abroad market will maintain medium to high growth even after a rapid recovery, mainly because the proportion of people studying abroad in our country is still very low. Compared with Vietnam's 1.3% study abroad penetration rate of 1.9% (annual students studying abroad divided by high school and undergraduate students), China's 0.4% penetration rate leaves a lot of room for improvement.
Maintain a buy rating. Due to the high number of trainees, the number of 2Q teaching sites increased to 843, an increase of 19.1% year on year and 6.3% month on month. The company increased the annual growth rate of teaching points to 20%. As a leading indicator of the number of trainees, we believe that the acceleration in the expansion of teaching sites represents a high level of demand, which is beneficial to future enrollment growth. Although the expansion of production capacity brought pressure on operating profit margins, the company's non-GAAP operating margin expanded 3.3 percentage points to 5.9% due to a high increase in literacy trainers and a strong recovery in the study abroad business. We raised our profit for the 24/25/26 fiscal year to $482 million, $664 million, and $869 million. We raised our target price to $110.81, corresponding to a 45.4% increase in the current price, maintaining our buy rating.
Risk warning: Non-subject training supervision policies have been strengthened; overseas geopolitical factors have blocked overseas study visas, and business recovery has slowed down.