Event: On the evening of July 31, New Oriental announced FY2024Q4 and full year results. From March to March 2024, net income was 1.137 billions/yoy +32%, net profit to mother was 0.027 billions/yoy -7%; non-GAAP operating profit 0.036 billions/yoy -54%; and non-GAAP net profit to mother was 0.037 billions/yoy -41%. FY2024 full-year net revenue of 4.314 billions/yoy +44%, non-GAAP net profit of $0.381 billions/yoy +47%.
FY2024Q4 revenue slightly exceeded guidance, and profits fell short of expectations, but profit side turbulence was short-term. FY2024Q4 revenue was 1.137 billion dollars, yoy +32%, slightly exceeding previous guidance (yoy+28-31%), and maintained relatively rapid growth under a high base last year. Non-GAAP operating profit of $0.036 billion, yoy -54%, was lower than market expectations ($0.069 billion). The decline in FY2024Q4 profits was mostly affected by multiple factors: 1) increased costs brought about by the accelerated expansion of teaching sites, as well as investment in cultural tourism business and increased remuneration and rewards for management and employees; 2) investment in Oriental Selection, and expenses brought about by the sale of its peers. We believe that in the current environment, it is reasonable to accelerate the education and training business layout, and the overall expansion of the company's outlets is steady. It is expected that FY24Q4 net profit margins will not decline. As the peak summer season approaches, the utilization rate of FY25Q1 outlets is expected to increase, leading to a recovery in education and training profit margins. Also, the impact of the transaction with Hui is one-off, and it is expected that it will be digested by FY25Q1.
The revenue guidance for the FY2025Q1 education and training business (non-selected portion) also increased by 31-34%, and the profit margin guide increased by 2ppt. FY2025Q1 expects education and training revenue of USD 1.255-1.284 billion, yoy+31-34%. Combined with the deferred revenue balance of 1.78 billion US dollars at the end of FY2024Q4, yoy +33%, considering that the summer base was already high last year, we think the positive trend in the education and training business is still clear. Judging from the expansion of production capacity, as of May 31, 2024, the number of the company's offline teaching sites reached 1,025, yoy +37%, recovering to a high of 60%. The net increase in the last four quarters was 45/50/86/114, reflecting strong offline demand and laying the foundation for subsequent growth. On the FY25 annual scale, the company plans to grow its network by 20-25%.
The industry is booming. The company has obvious advantages as a leader, and is optimistic about the healthy development of the education and training business. The company quickly transformed non-disciplinary compliance businesses after the “double reduction”. The product matrix is rich, the brand reputation continues, the national network base is deep, and the advantages of the teaching, research and teacher training system are still there. Currently, education and training industry policies are stable, supply recovery for compliance agencies is still limited, and there is still a big mismatch between supply and demand. Along with the expansion of the company's production capacity and the increase in enrollment, we expect the company's education and training business prospects to improve. Combined with the rate of capacity expansion, we expect the company's education and training revenue growth rate to maintain a relatively rapid growth rate throughout the year of FY25, and the current proportion of new teaching sites is high. As the utilization rate of newly opened teaching sites climbs, profit margins are expected to increase.
Investment advice: Based on the latest financial report, we expect FY2025-2027 revenue of 5.302/6.56/7.864 billion dollars, a 3-year compound growth rate of 22%; non-GAAP net profit of 0.577/0.754/0.948 billion, a 3-year compound growth rate of 36%. EPS (based on non-GAAP net profit) PE corresponding to FY2025-2027 at the closing price of August 2, 2024 was 17/13/11 times, respectively. Maintain a “Recommended” rating.
Risk warning: 1) Risk of stricter policies; 2) New business development falling short of expectations; 3) Increased industry competition; 4) Risk of declining teaching quality and reputation.