Improving quality and efficiency and shifting to high-quality development, medium- to long-term profits to be released
Oriental Education achieved revenue of 3,979 million yuan (yoy +4.2%) and adjusted net profit of 281 million yuan (yoy +5.4%) in 23 years. The main reason that revenue and profit fell short of our previous expectations (RMB 4.135 billion/ $442 million) is that the company shut down and integrated some institutions with poor profitability during the year to promote long-term high-quality development. We expect the improvement in operational efficiency brought about by the relevant adjustments will gradually pay off in 24 years.
We expect that in 24-26, with the gradual release of income contributions from long-time students, optimization of enrollment strategies, and improvement in operator efficiency, the company's adjusted net profit is expected to reach 4.20/4.93/603 million yuan. Referring to the comparable company 24E PE Wind's consistent expected average of 14.59x, we obtained a target price of HK$3.09 and maintained a “buy” rating.
New enrollment is growing steadily, and there is a good basis for revenue recovery
The company's revenue was affected by both new students and old students. Due to the blocking of long-term enrollment during the pandemic, old students contributed limited to revenue in the past two years, as reflected in the year-on-year average growth rate of trainees lower than the growth rate of new students enrolled throughout the year. Looking at 23, the number of new students enrolled in the Group increased 13.8% year on year to about 152,881, of which the three-year new enrollment increased 7.3% year over year to 53,197. We expect the company's overall revenue to maintain a steady upward trend in 24-26 as the continuing impact of the pandemic is gradually eliminated and the contribution of old students to revenue is gradually released.
Internal integration to improve efficiency and focus on high-quality development
In '23, the company began strategic adjustments, abolished and integrated some regional colleges and universities with weak profitability, and optimized the personnel structure. The number and proportion of the group's logistics and administrative personnel declined year-on-year. We expect the effects of improving human efficiency to gradually become apparent starting in '24. On the marketing side, in order to promote new enrollment, the company invested more resources in advertising and brand promotion (the New Oriental brand launched a new “Chef Panda” image). Sales expenses increased by about 9.6% year on year, but the average sales cost per student fell by about 4% year on year, reflecting an increase in customer acquisition efficiency. In '24, the company is expected to optimize online delivery channels and strictly control marketing rates. We expect that with the support of the above cost reduction and efficiency measures, the company's profit is expected to improve significantly year-on-year in '24.
Promote the construction of regional centers and strengthen long-term competitiveness
As the proportion of students in the three-year long-term course has increased, the company has strategically established regional centers on self-purchased land in cities in major enrollment provinces. Currently, the first phase of the Sichuan and Shandong projects have been put into operation, the first phase of the Guizhou and Henan projects are nearing completion, and the first phase of the Jiangsu and Jiangxi projects are being planned and advanced. The regional center brings together the Group's high-standard teaching facilities and resources. After completion, it is expected to raise the level of running schools, meet students' academic upgrading needs, and enhance student stability; replacing leasing with self-owned campuses is also expected to reduce the pressure of rising rents and achieve cost synergy.
Risk warning: The increase in the number of students enrolled falls short of our expectations; the construction of regional centers is progressing slowly or the benefits fall short of planning expectations; the diversion and competition of public vocational schools has intensified.