Incident: On the evening of January 24, New Oriental released its second quarter report for the 2024 fiscal year. From September to November 2023, we achieved net revenue of US$870 million, yoy +36.3%, net profit to mother of US$3.07 million, yoy +4007.4%; realized operating profit of US$21.34 million, reversing losses year-on-year; non-GAAP operating profit of US$50.9 million, yoy +212.2%.
The revenue side continues to be higher than the guideline, business lines such as overseas travel and literacy have increased, and revenue guidance for the next quarter is impressive. FY24Q2 had revenue of US$870 million, a year-on-year growth rate of 36.3%, exceeding previous guidance (US$785-804 million, growth rate of 23-26% year over year). Among them, overseas exam preparation and overseas consulting services grew by about 46.5% and 31.7% year on year (RMB caliber growth rate of 50% and 35%), maintaining relatively rapid growth. It is expected to benefit from demand repair & expansion (aging abroad) and pattern optimization; new education businesses increased 68.3% year on year (RMB caliber growth rate 72%), demand for literacy courses and learning opportunities is strong, and the study tour and cultural tourism business is progressing well; the domestic examination business for adults and college students increased by about 42.7% year on year (46% RMB caliber growth rate). As of the end of FY2024Q2, the company's deferred revenue balance was US$1,645 million, yoy +44.4%, maintaining a relatively rapid growth rate. The FY2024Q3 company's revenue guide was US$1,0709-1,093.5 million, up 42-45% year on year, and the growth rate guidance for the winter vacation quarter was impressive.
Profit margins continued to rise, and the Q2 off-season non-GAAP operating margin was 5.9%, a record high since FY2014. FY24Q2's gross profit margin was 51.4%, up 4.1pct year on year; sales/management expenses ratio 17.8%/31.1%, +2.9pct year on year; operating profit margin 2.5%, +2.8pct year on year; non-GAAP operating margin after excluding equity incentive expenses was 5.9%, +3.3 pct year on year, a record high since FY 2014. The increase in profit margins is expected to be mainly due to strong demand for training & significant optimization of the competitive landscape, and the launch of new businesses such as learning machines with higher human efficiency.
The number of education and training outlets expanded to 843 by the end of the period, an increase of 19% over the previous year. 1) As of November 30, 2023, the number of the company's schools and learning centers nationwide was 843, FY23Q3/FY23Q4/FY24Q1/FY24Q2 had a net month-on-month increase of 2/4/36/45/50, respectively, and the annual expansion plan was raised from 15%-20% to 20%.
2) Literacy courses have been launched in nearly 60 cities, and penetration continues to increase. The number of FY2024Q2 applicants was 786,000, an increase of 65%. China's top 10 cities contributed more than 60% of revenue. 3) Intelligent learning system devices are used in about 60 cities. The number of active paying FY24Q1 users was 180,000, an increase of 68%. China's top 10 cities contributed nearly 55% of revenue.
Investment suggestions: Out-of-school training policies continue to be clarified, the state supports the development of legally compliant courses and institutions, and policies and regulations are becoming more and more clear. The company is a leader in the domestic private education industry. It has strong brand, teaching and research, and channel advantages. The continuous recovery of traditional business+the launch of new businesses has driven the company back to the fast track of growth. Combined with the latest quarterly report, we raised FY2024-2026's non-GAAP operating profit to $537/7.33/963 million (original value: $519/7.23/$959 million), GAAP net profit of 3.85/5.39/724 million US dollars (original value was 3.72/5.30/718 million US dollars), and PE corresponding to the closing price on January 26, 2024 was 34/24/18 times, respectively, maintaining the “recommended” rating.
Risk warning: 1) Risk of stricter policies; 2) New business development falling short of expectations; 3) Increased industry competition; 4) Risk of declining teaching quality and reputation.