1QFY25 (June-August 2024) education business revenue is expected to increase 33% year over year, and profit margins improve

We expect 1QFY25 New Oriental's revenue to increase 34% year over year to 1.47 billion US dollars; non-GAAP operating profit is expected to be 0.287 billion US dollars, corresponding to a non-GAAP operating profit margin of 19.5%, a year-on-year decline of 2.7 ppt, mainly due to the impact of expenses related to the adjustment of the subsidiary Oriental Selection Business. In addition to Oriental Selection, the education business revenue for the quarter is expected to increase 33% to 1.27 billion US dollars, which is at the high end of the company's previous guidance range (1.25 billion US dollars to 1.28 billion US dollars); the education business is expected to record a 23.9% non-GAAP operating profit margin, an increase of about 2 ppt year over year, mainly due to the release of operating leverage.

The company issued an announcement on August 6, announcing that it will increase the share repurchase amount from 0.4 billion US dollars to 0.7 billion US dollars, which is valid until May 31, 2025. As of the announcement date, the company has repurchased about 0.33 billion US dollars, and there is still a repurchase amount of about 0.37 billion US dollars under the current repurchase plan. Additionally, the company announced on August 19 that it will pay a special cash dividend of USD 0.6 per ADS, for a total of approximately USD 0.1 billion.

Key points of interest

Revenue growth has remained steady. 1QFY25, we expect the company's business revenue other than Oriental Selection to increase 33% year-on-year to 1.27 billion US dollars, which is at the high end of the company's previous guidance range. By sector, we expect that revenue from the study abroad exam preparation and consulting business will increase by about 19% year on year (accounting for 21% of revenue), slower than our previous expectations (20-25%), mainly due to the contraction in demand for high-end one-on-one courses in the context of consumption downgrade; despite this, thanks to the company's rich reserves of course products, we expect this part of the exam preparation and language training business to gradually transform into classes; domestic exam preparation and language training business revenue will increase by about 25% year on year (5% of revenue); the current demand for high school training business remains rigid, and revenue is growing steadily by about 20% year on year (accounting for 27% of revenue). teaching The launch of the point and OMO model; K9 may record a rapid year-on-year increase of more than 50% in revenue from non-disciplinary training and other new businesses, and the scarcity of high-quality supply is gradually highlighted.

We expect 1QFY25 Dongfang to select or contribute about 0.2 billion US dollars in revenue, an increase of 40% over the previous year, mainly due to the contribution of Huihui's GMV in June-July 2024; the month-on-month decline was 21%, mainly considering the divestment with Huihui in August.

The profit margin of the education business rebounded as scheduled. 1QFY25, we expect the non-GAAP operating margin of businesses other than Oriental Selection to return to a year-on-year improvement trend, mainly due to the release of operating leverage and the elimination of one-time effects such as compensation incentives for the education business in the previous quarter. We expect the company's overall non-GAAP operating profit for the quarter to include nearly RMB 0.2 billion in expenses related to the adjustment of Oriental Selection Operations (including the “Walk with Hui” undistributed profit distributed to Mr. Dong Yuhui).

Profit forecasting and valuation

Keep FY25/26 revenue and non-GAAP net profit forecasts unchanged. Maintaining an outperforming industry rating and target price of $90 (based on FY25 SOTP valuation) corresponds to 27 times the FY25 non-GAAP price-earnings ratio. Currently, the company is trading at 19 times the non-GAAP price-earnings ratio, which corresponds to 45% upside.

risks

Non-subject training policy risk; high school business policy risk; live streaming business sentiment risk.