Incident Overview

In 2023, the company's revenue/ net profit attributable to mothers/ adjusted net profit were $39.79/2.73/281 million yuan respectively, up 4.2%/-25.8%/5.4% year-on-year. Among them, net profit returned to mother in the first half of the first and second half of the year was 2.04/069 million yuan respectively, up -15.9%/-47.3% year-on-year. According to our analysis, profit elasticity has not been reflected in 23 years, mainly due to a gap in new recruitment of long-term students during the pandemic, which led to a low growth rate for long-term students; when the adjusted net profit growth rate was lower than the revenue growth rate, the decline in capacity utilization, gross margin, and the increase in sales expenses due to the impact of long-term students.

23 The year-end dividend was HK$0.2 per share, with a dividend rate of 145% (108% in '22), corresponding to a dividend rate of 8.3%.

Analytical judgment:

Enrollment slowed in the second half of the year, and Wantong maintained high growth. Overall, there was an increase in the number of new recruitments/trainers in 23, with an increase of 13.8%/2.9%. Looking at the first half of the year, the number of new recruitments/trainers slowed in the second half of the year. The number of new recruitments/ average trainers in the first half of the year was 8.5/147,000, up 20.0%/2.6% year on year; the average number of new recruitments/trainers in the second half of the year was 6.8/146,000, up 6.9%/3.1% year on year. (1) By business, New Oriental and Xinhua Computer's long-term student enrollment growth has been weak due to the impact of the epidemic, and Wantong Auto Repair is still growing rapidly, benefiting from the launch of comprehensive majors such as intelligent processing+industrial robotics, new media operation+business management. New Oriental/Xinhua Computer/Wantong Automotive/Omiche/Huaxin Zhiyuan/Delicious Academy/Other revenues were 18.65/7.44/8.47/3.31/0.38/0.49/252 million yuan respectively, up -1.4%/0.3%/18.0%/12.4%/-13.0%/-12.8%/37.8%. Looking at the first half of the year, Huaxin Zhiyuan saw the biggest drop in the first half of the year; New Oriental's growth rate improved in the second half of the year, and Delicious Academy saw the biggest decline: New Oriental/Xinhua Computer/Wantong Automic/Omiche/Huaxin Zhiyuan/Delicious Academy/other revenue increased by -3.0%/4.2%/24.5%/2.7%/-26.7%/9.4%/1.5%; the second half of the year increased by 0.2%/-3.4%/12.5%/23.4%/-0.4%/-37.2%/87.3%.

(2) Looking at the number of students: 1) By business segment: the average number of trainers was 5.9/0.5/0.1/4.1/0.05/3.9/0.2 million, respectively, with a year-on-year increase of -2.8%/7.0%/-11.6%/-2.1%/15.6%/15.6%/128.7%; 2) By course cycle: 13.1/1.6 million for long-term and short-term courses, respectively, an increase of 0.4%/29.4%. Long-term courses declined a lot (-37%), and the proportion of students in 1-2 years/2-3 years/3 years was 6%/18%/76%, an increase of 1/-11/10PCT over the previous year.

(3) Looking at the unit price, Huaxin Zhiyuan's price dropped significantly. The average passenger unit price of New Oriental/Omiche/Delicious Academy/ Xinhua Computer/Huaxin Zhiyuan/ Wantong Auto was 3.2/6.9/5.7/1.8/6.7/22,000 yuan respectively, up 1.4%/5.1%/-1.4%/2.5%/-27.5%/2.0% over the previous year.

There was a marked increase in new enrollment for 1-2 year and short-term students, leading to an increase in the overall employment rate.

(1) The total number of schools is 245, with a net opening of 1 compared to the previous year. The structure was slightly adjusted, cooking contracted, and the automotive and beauty industries continued to expand. New Oriental/Omiche/Delicious Academy/Xinhua Computer/Huaxin Zhiyuan/Wantong Auto/Ormandi were 76/46/18/39/20/41/5, respectively, with a net opening of -1/0/-2/1/-1/2/2 compared to the previous year. (2) In terms of the number of new students enrolled, New Oriental/Omiche/Delicious Academy/Xinhua Computer/Huaxin Zhiyuan/Wantong Automanti had 5.8/1.4/1.0/2.7/0.3/3.7/0.3 million users respectively, an increase of 13.9%/23.2%/9.8%/1.5%/-8.7%/18.5%/125.7%. The number of long-term and short-term courses was 7.3/80,000, up 4.5%/23.8% year on year. Among them, the long-term 2-3 year system declined a lot (-18%), and the proportion of students in 1-2 years/2-3 years/3 years was 12%/15%/73%, an increase of 2/-4/2PCT over the previous year. New Oriental's three-year and short-term programs grew 19.4%/23.3%, accounting for 33%/51% respectively; Wantong Auto's 1-2 year system had the fastest growth rate (65.4%), followed by short-term growth of 31.9%; Xinhua Computer's three-year system showed negative growth (-4.9%, accounting for 65%). Our analysis was affected by employment-side and high school competition, but short-term classes grew rapidly (56.6%, accounting for 18%). (3) Guide the overall increase in the employment rate. By brand, the employment rates of New Oriental/Omiche/Xinhua Computer/Wantong/Ormandy were 94.5%/94.7%/94.8%/96.4%/95.7%, respectively, up 0.5/2.4/0.1/0.2PCT over the same period last year.

The decline in gross margin was mainly due to an increase in remuneration costs. The decline in net profit to mother was higher than gross margin mainly due to a decrease in exchange earnings and an increase in sales expenses. (1) The company's gross margin in '23 was 48.0%, a year-on-year decrease of 1.5PCT, mainly due to a sharp rise in faculty and staff salaries and teaching-related consumables. Among them, employee remuneration increased 14.2% year on year. By business, the gross margins of New Oriental/Omic/Delicious Academy/Xinhua Computer/Huaxin Zhiyuan/Wantong Automobile/other businesses in '23 were

49.9%/48.0%/46.4%/49.3%/48.0%/49.8%/-8.4%, year-on-year increase of -3.9/13.0/8.4/-3.1/-7.7/1.1/5.2PCT. (2) The company's net interest rate to mother in '23 was 6.9%, down 2.8 PCT year on year; looking at the first half of the year, net interest rate to mother was 10.4%/3.4%, respectively, down 2.1/6.2 PCT year on year. 1) Sales/management/R&D/finance expense ratios were 26.06%/13.30%/0.44%/3.50%, respectively, up 1.28/-0.11/-0.13/-0.59PCT. The increase in sales expenses was mainly due to hiring professional consultants to design a new image for New Oriental (Chef Panda) in the first half of the year, thereby increasing investment in advertising expenses; 2) Other revenue/revenue -2.5PCT to 1.1% yoy, mainly due to a year-on-year decrease in foreign exchange earnings of 68% to 0.43 million yuan; the share of other revenue increased by 0.7 PCT to 3.5 million yuan %, mainly due to an increase in interest income of $34 million; income tax/revenue decreased by 1 PCT to 2.40%. 3) By business, New Oriental, Xinhua Computer, and Huaxin Zhiyuan OPM declined significantly. New Oriental/Omiche/Delicious Academy/Xinhua Computer/Huaxin Zhiyuan/Wantong Automobile/other business OPMs were 15.3%/7.4%/-8.6%/-6.3%/30.2%/-24.1%, respectively, with a year-on-year increase of -7.7/-4.0/5.1/20.7/7.3PCT. Looking at the first half of the year, New Oriental OPM declined significantly in the first half of the year; Omega's OPM increased significantly in the second half of the year. New Oriental/Omiche/Delicious Academy/Xinhua Computer/Huaxin Zhiyuan/Wantong Auto OPM grew by -10.5/5.7/15/-1.8/-21.3/12.6PCT in the first half of the year, and -4.8/36.3/2.3/-6.7/-10.9/-1.4PCT in the second half of the year.

Investment advice

According to our analysis, the company's main problems are: (1) the pandemic has affected long-term student enrollment. After 23 years of impact, we expect it to take another year; however, long-term student enrollment in New Oriental has shown rapid growth after the epidemic, and dividends are expected to lag; (2) sales expenses remain high, partly due to public competition, and on the other hand due to high Internet traffic costs, but in the future, the company is expected to increase the proportion of customers acquired through channels, optimize online customer acquisition channels, and reduce customer acquisition costs. In the long run, (1) the company focuses on asset attributes, and the profit flexibility brought about by the climbing capacity utilization rate is expected to be reflected; (2) after the construction of the company's regional center is completed, the qualifications of the College of Technicians are approved, which is expected to prolong the academic system. The previous profit forecast was lowered to 48.5/5.45 billion yuan to 4.4.5/5.10 billion yuan, adding a 26-year revenue forecast of 5.80 billion yuan; the 24/25 net profit to mother was lowered to 7.8/1.02 billion yuan to 40/480 million yuan, and the net profit forecast for 26 years was increased by 620 million yuan, corresponding to a reduction of 24-25 EPS of 0.36/0.47 yuan to 0.19/0.22 yuan, and an additional 26-year EPS of 0.29 yuan, March 28, 2024 The closing price of HK$2.40, corresponding to the 24/25/26 PE, was 8 times that of 12/10/26 (1 HKD = RMB 0.93), maintaining a “buy” rating.

Risk warning

Potential risks of policy changes, channel expansion and campus utilization falling short of expectations, new category track expansion falling short of expectations, intense market competition and threats from new entrants, and systemic risks.