Key points of investment
Incident: FY24Q3's revenue was US$1.21 billion (yoy +60.1%), exceeding previous performance guidelines (US$1.07 to US$1.09 billion). All business lines grew across the board, and network expansion accelerated. By business, FY24Q3 overseas exam preparation revenue increased 52.6% year on year (in US dollars, same below), overseas consulting business revenue increased 25.7% year on year, domestic exam preparation business revenue increased 53.2% year on year, and new education business revenue increased 72.7% year on year. As of 2024/2/29, the company's deferred revenue increased 30.8% year over year to $1.52 billion. The company expects FY24Q4 revenue to be 110-1.13 billion yuan, an increase of 28% to 31% year-on-year.
The expansion of the number of outlets is accelerating, and operating profits are growing rapidly. FY24Q3 continues to expand its network and moderately expand its teaching space. As of 2024/2/29, the total number of schools and learning centers increased to 911 (199/68 year-on-year increase), which has recovered to 55% of FY21Q4. The expansion rate has further increased compared to FY24Q2, reflecting the good market demand for the company's products. FY24Q3 operating profit increased 70.6% year over year to US$110 million, and non-GAAP operating profit increased 60.3% year over year to US$140 million. The growth rate was basically in line with the revenue growth trend. The non-GAAP operating margin was 11.7% (same as year on year). FY24Q3's non-GAAP net profit increased 9.8% year over year to US$100 million. The growth rate was lower than revenue, mainly due to non-current items.
New education businesses continue to grow rapidly, benefiting from clarifying non-subject training policies. FY24Q3 New Oriental Education's new business revenue increased 73% year over year, and has contributed to profits. Among them, the number of applicants for the non-subject tutoring business increased 62.8% year over year to 355,000, and the number of active paying users in the smart learning equipment business increased 74.1% year over year to 188,000, and the retention rate also increased. In February 2024, the Ministry of Education issued the “Regulations on the Administration of Out-of-School Training (Draft for Comments)”. While promoting the management of out-of-school training in accordance with the law, it is also facing up to reasonable training needs and guiding high-quality non-subject training to enrich market supply. Two years after the implementation of the double reduction policy, effective supply in the industry was reduced, providing more room for leading institutions to rise.
Profit forecast and investment rating: FY24Q3's revenue growth exceeded previous performance guidelines, and the speed of network expansion also increased. We raised the company's FY2024-2026 revenue forecast from $41/50/5.8 billion to $43/55/6.5 billion. As e-commerce increases self-operated brands and supply chain construction, and cultural tourism and network expansion also requires increased investment, cost side or simultaneous growth, we maintain FY24-26 non-GAAP net profit of US$4.1/5.2/US$63 billion. The current stock price corresponds to PE of 35/28/23 times (converted according to the 2024/04/28 US dollar exchange rate of 7.8281 to HKD), maintaining a “buy” rating.
Risk warning: Talent loss and brand reputation risk, competition in the education industry exacerbates risks, and new business development falls short of expectations.