4QFY24 (March 2024 to May 2024) profit fell short of market expectations New Oriental announced 4Q FY24 results: revenue of 1.14 billion US dollars, up 32.1% year on year, in line with consistent market expectations; non-GAAP net profit of 36.93 million US dollars, down 40.5% year on year, significantly lower than market expectations. It was mainly affected by the accelerated expansion of learning centers, increased investment in cultural tourism business, and increased employee compensation incentives.
Development trends
The education business is growing steadily, and learning centers are expanding faster than expected. 1) Education retention business: Revenue from study abroad exam preparation business/ study abroad consulting business was +17.7%/+17.3%, respectively, accounting for about 26% of revenue; revenue from domestic exam preparation and language training business was +16.4% year-on-year, accounting for about 4% of revenue; high school training business accounted for about 26% of revenue. 2) New education business: Revenue +50.3% YoY, accounting for about 20% of revenue, of which:
Non-disciplinary K9 tutoring was carried out in about 60 cities. The number of students enrolled in the quarter was +39% to 0.875 million; active paying users of intelligent learning systems and devices increased 90% to 0.188 million compared to the same period last year. 3) Cultural tourism business:
Study tours and research camps for students have been launched in about 65 cities across the country, and high-end cultural tourism products for all age groups have been piloted in 27 characteristic provinces. In addition, the company continued to invest in the upgrading of the OMO system, which reached 30.5 million US dollars during the quarter. In terms of learning centers, as of the end of May 2024, the company had 1,025 schools and learning centers, an increase of 114 over the previous month. In line with FY24, the annual capacity of learning centers increased by 37%, and the pace of expansion was faster than 30% of the management's previous guidance.
There is an urgent need for profit margins in the education business to improve. The company indicates that 1QFY25 (June-September 2024) revenue ranged from 1.2547 billion US dollars to 1.2835 billion US dollars (excluding Oriental Selection), an increase of 31-34% year-on-year, which is basically in line with market expectations; considering the elimination of one-time effects such as compensation incentives in the education business, we expect 1QFY25's non-GAAP operating margin of businesses other than Oriental Selection to record a year-on-year improvement of about 2 percentage points, including losses in the cultural tourism business of about 50 million yuan.
Profit forecasting and valuation
Considering the Oriental Selection business adjustments, FY25/26 revenue was reduced by 1.8%/0.7% to $5.31/6.63 billion; non-GAAP net profit was reduced by 6.0%/6.6% to $0.549/0.742 billion. We are optimistic that the company's education retention business and new business are superior to the industry's growth prospects and profitability improvement space, and maintain the industry rating; lower the target price by 18% to $90 (based on the FY25 SOTP valuation, we give 20x FY25 P/E based on FY4.5 billion dollar revenue, 20% steady operating profit margin, and 22.5% effective tax rate assumptions; at the same time, we use Oriental Selection's latest target market value to calculate the market value of the group; based on careful considerations, net cash is not included for the time being), Corresponds to 27 times FY25 non-GAAP price-earnings ratio. The company is currently trading at 19 times the FY25 non-GAAP price-earnings ratio, corresponding to 43% upside.
risks
Non-disciplinary training policy risks; high school business policy risks; live streaming business sentiment risks; Dongfang's asset selection and sale matters have not progressed as expected or repeatedly; the market impact of the sale incident with Hui has exceeded expectations.