Deeply involved in education for 20 years, actively transformed after “double reduction”
New Oriental was founded in November 1993 in Beijing, China, and has been booming for 20 years; in 2006, the company was successfully listed on the NYSE, becoming the first educational institution in mainland China to be listed in the US; in 2019, New Oriental Online was listed on the Hong Kong Stock Exchange, becoming the first Hong Kong stock online education stock, and launched a dual platform strategy. After the double reduction, the company identified five major transformation directions other than traditional business, namely non-academic tutoring, intelligent learning systems and equipment, study tours and research camps, textbooks and digital intelligent learning solutions, and preparation for special entrance examinations. In addition, New Oriental Online Transformed Oriental Selection, leading the new model of “knowledge-based delivery”.
A sea of stars in quality education, the second spring of K9 extracurricular training has arrived
Since the implementation of the double reduction policy, education in K9 subjects has been fully clarified, and educational institutions have generally transformed quality education. The domestic quality education market audience is mainly concentrated among kindergarten to middle school students. In particular, kindergarten to elementary school are the main consumers of quality education. According to the forecast of the Duowhale Education Research Institute, the quality education market space in 2023 is about 478.7 billion yuan. According to the national comprehensive platform for out-of-school education and training supervision and service, there are currently more than 100,000 offline and 5 online quality education institutions in the country, which have reached 82% of the number of pre-reduction subject education institutions. Among them, past subject education leaders such as New Oriental and Good Future have rapidly transformed and quickly occupied a leading position in the quality education market. According to our estimates, the share of the quality education market in 2023 New Oriental and Good Future was about 0.97% and 0.76% respectively, compared to before the double reduction. The combined market share of the two is nearly 10% in subject education, and there is still plenty of room.
The impact of the double reduction has basically subsided, and performance has returned strongly
The company's performance picked up at an accelerated pace. 24H1 revenue reached 1.97 billion US dollars, exceeding the same period before the double reduction. Excluding Dongfang Selection's revenue, which transformed into live streaming e-commerce, 24H1 revenue was US$1.58 billion, an increase of 31.62% compared to 21H1. In terms of profit, the company quickly achieved net profit correction after experiencing pain in FY2022, and continued to recover rapidly. 24H1 net profit of 200 million yuan has recovered to 85.5% of the 21H1 level. The company continues to give guidance that exceeds expectations. The company expects the revenue range for the third quarter to be US$1.07 billion to US$1.09 billion, an increase of 42%-45% over the previous year. We believe that New Oriental has gradually overcome the impact of the double decline, and profitability is expected to recover further.
Profit forecasting
With strong supply and demand on the quality education circuit, compounding the steady growth of the company's other businesses, we expect the company's revenue for the 2024-2026 fiscal year to be US$42.4/52.7/6.36 billion, with net profit due to mother of US$4.2/6.1/US$760 million, and earnings per share of US$0.26/0.37/0.46, corresponding to the closing price of HK$71.95 on February 23, 2024, and PE 36.08/24.81/19.96X (USD/HKD exchange rate 1:7.8210), respectively.
In terms of the business of New Oriental's headquarters, we believe that with the development of new businesses such as quality education, the company's valuation is expected to recover before being reduced; Dongfang's live streaming delivery business is still in its infancy, and we believe that there is still huge potential to be tapped in knowledge delivery. After New Oriental's double reduction, multiple lines went hand in hand. Quality education and knowledge delivery all gave full play to the advantages it had accumulated over many years. They were optimistic about the rapid volume of New Oriental quality education and live streaming delivery. For the first time, it was covered for the first time, giving it an “increase in weight” rating.
Risk warning
Quality education business demand falls short of expectations; competition in the quality education industry intensifies; high school business policy risks