4QFY24 (March-May 2024) revenue is expected to increase 33% year over year. We expect New Oriental to announce 4QFY24 results in late July. We expect 4QFY24's revenue to increase 33% year over year to 1.15 billion US dollars; non-GAAP operating profit is expected to be 0.069 billion US dollars, corresponding to the non-GAAP operating profit margin of 6%, a year-on-year decline of 3ppt. This is mainly due to the effects of the downward drag in the profit margin of the subsidiary Dongfang Selection, an increase in one-time bonus expenses for the education business, and the acceleration of the expansion of learning centers.

Key points of interest

Strong demand is expected to drive high revenue growth. With 4QFY24, we expect the company's revenue to increase 33% year over year to $1.15 billion, slightly exceeding the upper limit of the company's previous guidance of $1.1273 billion. Looking at the 4QFY24 sector, we expect: 1) In the retention business, demand for study abroad preparation and consulting services will continue to be strong, with revenue growth of 25% year-on-year, accounting for 26% of revenue; domestic exam preparation and language training accounts for a low number of units; the high school training business is growing steadily, and we expect the business revenue to grow 25% year-on-year under the OMO model; 2) In the new business, we believe that the K9 non-subject training and learning machine business circuit is highly deterministic. It is expected that the new 4QFY24 business will continue to grow at a high rate and achieve a year-on-year increase of about 60% in revenue; 3.) The holding company Dongfang Selection contributed about 24% of revenue; according to Feigua data, thanks to the launch of a new live broadcast by Huihui's peers (contributing 47% of GMV during the period) and high-popularity special contributions, the GMV of Dongfang Selection Douyin Live Stream increased by about 44% year-on-year to 3.4 billion yuan in March 2024, and revenue growth rate or about 50% year-on-year.

Education margins are under pressure in the short term, and the long-term improvement trend remains unchanged. According to the learning center expansion plan previously guided by the company, we expect the number of learning centers to expand by more than 30% to more than 1,000 by the end of 4QFY24; this may put pressure on 4QFY24 gross margin, but we believe that the spring expansion positively confirms the strong level of summer demand and is expected to lay a good foundation for the company's summer revenue growth.

In terms of operating profit, we expect 4QFY24's non-GAAP operating profit of 0.069 billion US dollars, an operating profit margin of 6%, a year-on-year decline of 3ppt, mainly due to the impact of the restructuring of the Oriental Selection Platform, pressure on profit margins due to increased investment in proprietary products (but month-on-month or improvement), as well as an increase in one-time bonus expenses for the company's education business and accelerated expansion of learning centers. Looking ahead to FY25, considering that the demand side remains strong and the company's learning center's profit is climbing, we expect the non-GAAP operating profit of the company's education business to increase from FY24's $0.4 billion to about $0.58 billion, corresponding to an improvement in operating profit margin by more than 1ppt.

Profit forecasting and valuation

The revenue forecast for FY24 and FY25 remained essentially unchanged; considering the impact of the tax rate increase of the acquisition of the Oriental Choice Education business and the uncertainty about the pace of improvement in Oriental Choice's profit margin, FY24/FY25 non-GAAP net profit was lowered by 6%/2% to USD 0.414/0.584 billion. Introduce FY26 revenue and non-GAAP net profit forecasts of $6.67/0.794 billion. Maintain the company's outperforming industry rating and target price of $110 (switch to FY25 SOTP valuation, corresponding to 31 times FY25 non-GAAP price-earnings ratio).

The current share price is trading at 23 times the FY25 non-GAAP price-earnings ratio, corresponding to 39% upside.

risks

Non-subject training policy risk; high school business policy risk.