FY2024 3rd quarter results preview: The company will release results on April 24 (Beijing time). We expect revenue of US$1,088 billion, +44% year over year (RMB 7.78 billion, +50% year over year).
The adjusted operating profit is estimated at US$130 million and net profit of US$120 million. Compared with previous expectations, gross profit and operating profit were reduced by US$12 million, and the operating profit/net profit margin was reduced by 1 percentage point to 12%/11%.
The increase in revenue share of new businesses has had a slight negative effect on profit margin optimization. By business, the estimated income for studying abroad for the exam is +32% /high school +16% /non-subject literacy +115% /Oriental selection +45%, compared with 34%/23%/114%/48% expected by Visible Alpha. Revenue growth mainly comes from overseas consulting, high school, and non-disciplinary literacy in innovative businesses and Oriental selection. We estimate that innovation business accounted for 51% of revenue in the 3rd quarter, but Oriental Selection's profit margin was declining due to factors such as expansion, supply chain construction, and brand day activities, which were the main reasons affecting the company's overall profit margin decline.
The K9 related literacy and learning machine business continued to grow rapidly, and its revenue contribution rose to 22%. As of March 2024, it is estimated that teaching sites at the New Oriental Literacy Center account for nearly 50% of the total number of teaching sites, which may increase by more than 100 teaching sites over the same period last year. Driven by the peak winter vacation season, non-subject literacy business revenue is expected to grow 115% year on year and 78% of learning opportunities, contributing a total of 22% to total revenue, up 5 percentage points year on year.
Oriental Select's revenue grew at an accelerated pace, but profit margins may have declined by 4 percentage points year over year. According to Cicada's mom's data, Dongfang Selection's GMV increased 75% year over year to 5 billion yuan in the 3rd quarter. The main increase came from the “Walk with Hui” Douyin account, as well as non-live streaming contributions from Taobao, its own apps, and self-operated products. The estimated revenue is about 1.96 billion yuan, an increase of 56% over the previous year, mainly due to the incremental contribution of the new “Walk with Hui” account to GMV. Oriental Selection's adjusted operating profit margin is expected to be 16%, offsetting New Oriental Education's profit margin optimization.
Prospects and valuations. We raised our revenue forecast for the 2024/25 fiscal year by 1%, increasing operating profit by 4%/9%, respectively. We expect a compound revenue/operating profit growth rate of 22%/26% for 2024-2026. Although profit margin optimization space may be affected by Oriental Selection in the short term, the main education industry is still growing healthily and steadily. Considering the increase in the industry's valuation center, the price-earnings ratio of the education business was raised to 25 times 2024, and the target price was raised to HK$94/120 (US EDU EDU EDU) , originally HK$75/$96), maintaining the buy rating.