Incidents:
① The company announced FY2024Q4 results on July 31, 2024. FY2024Q4 achieved operating income of 1.137 billion US dollars, yoy +32%, non-GAAP net profit of 36.93 million dollars, yoy -40.5%.
② The company announced on August 6 that it will increase the total repurchase value in the July share repurchase plan from 0.4 billion US dollars to 0.7 billion US dollars. As of August 6, 2024, 0.33 billion US dollars have been repurchased.
Investment highlights:
FY2024Q4's revenue was in line with expectations, and profits fell short of expectations due to the growth of Oriental Selection's business and the increase in network expansion costs
(1) On the revenue side, the company's FY2024Q4 achieved operating income of 1.137 billion US dollars, yoy +32%. Before the announcement, Bloomberg agreed to expect 1.136 billion US dollars, which is in line with expectations. By business, overseas exam preparation and overseas consulting business yoy +18%/+17%; domestic examination business for adults and college students yoy +16%; new education business yoy +50%, maintaining a high growth rate.
(2) On the gross profit side, the company's FY2024Q4 gross profit was 0.594 billion US dollars, yoy +27%, gross profit margin 52%, -2pct year over year, +6pct month-on-month.
(3) On the cost side, the company's FY2024Q4 sales expenses were 0.208 billion dollars, yoy +41%, sales expense ratio 18%, +1pct year over year, +5pct month on month; management expenses were 0.376 billion US dollars, yoy +37%, management expenses rate 33%, +1pct year over year, +9pct month over month.
(4) On the profit side, the company's FY2024Q4 operating profit was 10.53 million US dollars, yoy -78.1%, operating profit margin 0.93% (Bloomberg agreed to expect 6.07% before the announcement), non-GAAP operating profit of 36.32 million dollars, yoy -53.8%, and non-GAAP operating profit margin of 3.2%, which fell short of expectations mainly due to ① the increase in costs and expenses due to the growth of business related to Oriental Selection; ② increased costs and expenses due to the expansion of offline teaching outlets. FY2024Q4 net profit to mother of 26.97 million dollars, yoy -6.9%, non-GAAP net profit of 36.93 million dollars, yoy -40.5%.
(5) On the balance and liability side, as of the end of the FY2024 period, the company's cash and cash equivalents were $1.389 billion, term deposits (current) were $1.32 billion, and short-term investments were $2.066 billion.
(6) The company expects FY2025Q1 revenue (excluding Oriental Select's own products and live e-commerce business) of 12.55 to 1.284 billion US dollars, yoy +31% to +34%. The pace of expansion of the company's network is accelerating, traditional businesses continue to be repaired, and new businesses are developing rapidly. FY2025Q1 is expected to maintain a high growth rate.
FY2024's annual revenue returned to the level before the double reduction, and the annual performance was excellent (1) on the revenue side. The company FY2024 achieved operating income of 4.314 billion US dollars, yoy +44%, compared to FY2021 (before the double reduction) yoy +1%, and has recovered to the level before the double reduction.
(2) On the gross profit side, the company's FY2024 gross profit was 2.263 billion US dollars, yoy +42%, gross profit margin of 52%, year-on-year, -1 pct, mainly due to increased costs due to network expansion.
(3) On the cost side, the company's FY2024 sales expenses were 0.661 billion US dollars, yoy +49%, sales expense ratio was 15%, the same as the previous year; management expenses were 1.252 billion US dollars, yoy +31%, and the management expenses ratio was 29%, 3pct year on year.
(4) FY2024 annual operating profit of 0.35 billion US dollars, yoy +84.4%, non-GAAP operating profit of 0.473 billion US dollars, yoy +69%, non-GAAP operating margin of 11%, +2pct year on year, mainly due to a decrease in management expenses. FY2024 net profit for the full year was 0.31 billion dollars, yoy +75%, non-GAAP net profit 0.38 billion dollars, yoy +47%, non-GAAP net profit of 8.8%, +0.2pct year on year.
The month-on-month increase in outlets exceeded the previous peak, and the certainty of future revenue expansion increased. Under Dong Yuhui's departure, Dongfang Selection's revenue profit or phased pressure was on
(1) With the rapid expansion of outlets, the revenue from the education business is expected to increase. By the end of the FY2024Q4 period, the company had a total of 1,025 schools and learning centers (of which 81 schools and 944 teaching centers) were +114 month-on-month and +277 year-on-year, returning to around 61% of the peak before the double reduction (FY2021Q4). The number of FY2024Q4 non-disciplinary business applicants reached 0.875 million, yoy +39%. Intelligent learning systems and devices are used in 60 cities, with 0.188 million active paying users, yoy +2.73%.
(2) Under the influence of Dong Yuhui's departure, the revenue and profit performance of Oriental Selection FY 2025 is expected to be under pressure. We estimate that the subsidiary Dongfang Selection FY2024 achieved revenue of 1.041 billion US dollars. Considering the impact of the announcement with Huihui in August, it is expected that the revenue growth rate of Dongfang Selection FY2025-2027 will slow down.
Profit forecast and investment rating: The company's education business is growing strongly, and new teaching outlets are being opened rapidly. Considering the company's accumulated brand reputation, operating experience, and sufficient capital in the education and training industry, we are optimistic about the growth of education business revenue under the logic of capacity expansion. We expect FY's 2025 education business revenue to be 4.134 billion US dollars, yoy +30%, education business non-GAAP operating profit of 0.843 billion US dollars, and the non-GAAP operating profit margin of 20%. Taking into account the impact of Oriental Selection, we expect FY2025-2027 to achieve revenue of 52.99/64.86/ 7.56 billion US dollars, net profit to mother of 0.479/0.672/0.872 billion US dollars, corresponding to PE 25/18/14x, and non-GAAP net profit of 0.561/0.772/0.971 billion US dollars, corresponding to non-GAAP PE21/15/12x, maintaining a “buy” rating.
Risk warning: New business development falls short of expectations, risk of exchange rate fluctuations, increased costs due to capacity expansion, seasonal business fluctuations, management risks, loss of core personnel, public opinion risk, regulatory policy, platform policy changes, public health events, brand reputation risk, downward valuation center, management-related risks, geopolitical and international relationship factors affecting study abroad business, etc.