Key points of investment:

New Oriental announced fourth quarter results for FY24 (4QFY24, 2024.3-2024.5), with revenue of 1.14 billion US dollars, up 32.1% year over year, and non-GAAP net profit of 0.037 billion US dollars, down 40.5% year on year. Excluding the impact of the RMB exchange rate against the US dollar, 4Q revenue increased by more than 38% year over year. FY24 full-year revenue was $4.31 billion, up 43.9% year over year, and non-GAAP net profit to mother was $0.381 billion, up 47.2% year over year. Revenue and profit are in line with our expectations, and the high annual performance growth continues to be driven by the literacy training business and study abroad business.

There was a strong increase in literacy education and training in the spring semester. Strong growth in new businesses, including the non-subject literacy training business, contributed to a high increase in the company's performance. This year, 4Q's new business revenue was 0.232 billion US dollars, an increase of 50% over the previous year. The demand for literacy training and learning machine users corresponding to the new business continued to improve. Among them, the number of non-subject literacy business trainers increased by 39.1% year-on-year to 0.875 million, continuing to drive high revenue growth. Furthermore, the number of learning machine subscribers reached 0.188 million, an increase of 89.9% over the previous year. Whether it is the rise in the non-subject literacy business or the continued boom in the number of active users in the learning machine business, it all stems from the reality that supply in the education and training market contracted after the “double reduction”, and demand did not decrease at the same time. Because we are taking on the demand for subject training before the “double reduction”, we believe that the scale of non-subject literacy training will have a high growth potential. The number of non-disciplinary literacy business trainees in FY24 was 2.45 million. Compared with New Oriental's “double reduction” of the number of participants trained in the previous year by about 12 million, there is still room for growth of about 5 times. And even if the scale of training is achieved for 12 million people, its market share is only 5% (we expect the literacy business to require about 0.24 billion training sessions per year). We believe that New Oriental's brand, teachers, teaching and research advantages will help the company's literacy business gain a higher market share.

The expansion of teaching sites is picking up speed again. Due to the high number of trainees, the number of 4Q teaching sites increased to 1,025, an increase of 37% year on year and 12.5% month on month. Both year-on-month and month-on-month growth rates were further accelerated compared to 3Q (3Q year-on-month growth rates were 27.9% and 8.1%, respectively). We expect the growth rate of teaching sites to remain at 20-25% in FY25. As a leading indicator of the number of trainees, we believe that the acceleration in the expansion of teaching sites represents a high level of demand, which is beneficial to future enrollment growth. In addition, the approval of teaching outlets has also entered the stage of normalized management. We believe that non-disciplinary training institutions' outlets will expand at an accelerated pace so that they can seize more market share in the blue ocean market. Judging from the pace of approval, applications from institutions with operational qualifications to add teaching outlets will be more likely to be approved, so New Oriental, which already has experience in running schools in more than 70 cities across the country, will have a strong first-mover advantage.

The study abroad business continues to soar. The company's study abroad business continued its rapid growth trend in the fourth quarter, contributing 0.284 billion US dollars in revenue, an increase of 17.4% over the previous year. The sector's annual revenue reached 0.993 billion US dollars, a year-on-year increase of 35%. The study abroad examination and training business is growing rapidly, and on the one hand, it is benefiting from the recovery of the study abroad market. On the other hand, the trend of studying abroad in our country at a young age has also led to a growing number of students studying abroad. We judge that the study abroad market will maintain medium to high growth even after a rapid recovery, mainly because the share of people studying abroad in our country is still very low. Compared with Vietnam's 1.3% study abroad penetration rate (annual study abroad students divided by high school and undergraduate students), there is still a lot of room for improvement in China's 0.4% penetration rate.

Operating efficiency was impaired in the short term, continued to improve over a long period of time, and the purchase rating was maintained. Due to the accelerated expansion of teaching outlets, along with an increase in teacher reserves, and an increase in total year-end bonus payments for the first time this year, 4Q costs rose faster than revenue growth, and the company's non-GAAP operating margin contracted 5.9 percentage points to 3.2% year on year. We expect the company's non-GAAP operating profit margin will steadily expand to 12.4% over the next 3 years as market supply is still tight and the company's production capacity expansion rate is set at a reasonable pace, an increase of about 1.4 percentage points over FY24. We expect the dust to settle on the Dongfang Selection anchor incident, and the market will also focus more on the company's main education business. We estimate that under the non-GAAP scale, Oriental Selection's profit contributions for fiscal year 25-27 accounted for 4.5%, 3.5%, and 2.8% of New Oriental's profit, respectively. Due to the acceleration of the expansion of teaching sites, the company's education business will accelerate, and revenue and profit contributions will continue to increase. We maintain our non-GAAP net profit forecast of $0.493 billion/$0.672 billion for fiscal year 25/26. An additional FY27 non-GAAP net profit forecast of $0.891 billion was added. Maintaining the target price of $109.45 (HK$85.6, each ADR is equal to 10 common shares; Hong Kong stocks are trading common shares), corresponding to a 74.2% increase in the current price (56.3% increase for Hong Kong stocks), maintaining the purchase rating.

Risk warning: Non-subject training supervision policies have been strengthened; overseas geopolitical factors have blocked overseas study visas, and business recovery has slowed down.