After the “double reduction”, they actively adapted to the new environment, and the transformation achieved remarkable results. The company was founded by Yu Minhong in 1993 and went public in the US in 2006 (second listing in Hong Kong in 2020). It is an established education and training agency in China. After the “double reduction”, the company stopped training in K9 subjects and actively adapted to the new regulatory environment, retaining compliant high school, study abroad training consulting, and college student & adult training services, while exploring new curves such as K9 education business, live e-commerce, and cultural tourism. In fiscal year FY2024, the company's revenue was US$4.314 billion/ +44%, or 101% of FY2021, and non-GAAP net profit of $0.381 billion/ +47%, recovering to 98% of FY2021, reaching 1,025 schools and learning centers at the end of the term (61% of FY2021), showing transformation results.

Transformation ideas: adapt to the new regulatory environment and explore diversified monetization of brand traffic. Prior to the “double reduction”, K12 subject training was driven by New Oriental's core growth. K12 subject training revenue in FY2021 accounted for 76% (estimated K9 revenue accounted for about 46%), the revenue growth rate was over 40% CAGR (2010-2020), and the performance of businesses such as study abroad and college student & adult training was relatively stable. After the “double reduction” policy, the K9 subject training business officially withdrew from the historical stage and explored and transformed into a new education business (literacy training+intelligent companion business), while the original education and training business of high school age and above was less affected. Furthermore, based on New Oriental brand traffic, the company added a new layout of e-commerce and cultural tourism businesses, and these businesses will complement each other in terms of operation.

Education and training industry: The supply is clear and demand is resilient. I am optimistic about the trend of head concentration. After the implementation of the “double reduction” policy in 2021, industry supply was drastically cleared. According to data from the Ministry of Education in October 2022, the number of offline K9 subject training institutions was nearly 96% lower than in July 2021. Starting in 2023, the regulatory authorities have re-examined the rationality of training requirements. Non-disciplinary training has ushered in development opportunities, but the industry is still showing a “shortage of superior supply - strong demand” trend. According to our estimates, the size of the K12 education and training market will return to before “double reduction” (500 billion) in 2025, and the share of leading institutions is expected to increase as leading companies expand production capacity and raise compliance standards in the industry.

Growth prospects: 1) New education business: After the withdrawal of K9 subject training, the new business centered on literacy training+intelligent learning companion business (learning machine) quickly took on demand, driven by core growth. FY2024 annual revenue was 0.89 billion US dollars/ +65%, and the expected growth rate in 2025-2027 is 55%/22%/20%, respectively, driven by network expansion; 2) High school subject/study abroad training & consulting/college student & adult training: traditional basic market business, FY24 revenue was 1.07/1/0.16, respectively In billion dollars, the growth rate is expected to be relatively stable at 15-20% over the next 3 years. Overall, the company's main education and training business is rapidly expanding in scale, and profit margins are expected to continue to improve driven by operating leverage. 3) E-commerce & cultural tourism business: The e-commerce division was affected by the departure of star anchors in the short term, but the deepening of the self-service layout still has potential for growth, and profit margins are expected to improve after subsidies return to normal; the cultural tourism business is currently in the early stages of investment, and the FY2025 fiscal year is expected to achieve a break-even balance.

Risk warning: Investment suggestions such as stricter policies, increased industry competition, slow increase in business penetration rate, and shareholder holdings reduction: We expect New Oriental FY to achieve revenue of 5.113/6.414/7.893 billion US dollars in the 2025-2027 fiscal year, up 18.5%/25.5%/23.1% year over year, and non-GAAP net profit of 0.528/0.796/1.093 billion US dollars, up 38.6%/37.4% year on year. New Oriental is a leader in the transformation of the education and training industry. Recently, stock prices have declined due to disruptions in e-commerce business operations and increased investment in education. Along with Oriental Selection's official announcement to divest “walk with Hui” and operations gradually return to the right track, the education and training business represented by the new education business has maintained high growth and profit leverage continues to show. The company is at the starting point of a new round of growth. Reviewing New Oriental's valuation history, the PE valuation center has been around 30x since the company's listing, and PE valuation can reach 40-60x during the rapid growth period. Considering the company's non-GAAP net profit CAGR of about 42% over the next 3 years, we gave the company a PE valuation of 25-28x for the FY2025 fiscal year, with a target market value of 13.2-14.8 billion US dollars (HKD/USD exchange rate is 7.7988, 103-115.4 billion HKD), compared with HK$62.2-69.7 The latest closing price still has room for an increase of 21.9-36.5%, maintaining the company's “superior to the market” rating.