Key points of investment:

We expect New Oriental's revenue for the first quarter of fiscal year 25 (1QFY25, 2024.6-2024.8) to be $1.462 billion, up 32.9% year over year, and non-GAAP net profit of $0.277 billion, up 46.4% year over year. The high increase in revenue and profit was driven by continued growth in the education business.

The literacy education and training business grew strongly. We expect 1Q education business revenue to increase 33% year-on-year to 1.242 billion US dollars, driven by rapid growth in literacy training, study abroad, and high school subject training business. We expect revenue from the new business, which includes non-subject literacy training, to grow 51.1% year over year to $0.356 billion. The growth of the education business is still mainly driven by non-subject literacy education and training.

We expect the number of non-subject literacy training trainers to reach 3.82 million this year, an increase of 55% over the previous year. There is still a lot of room for improvement in the number of trainers compared to the company's previous average of 12.2 million training sessions per year. Revenue from high school subject training, study abroad examinations, and adult education and training increased 18.6% year-on-year to 0.757 billion yuan. Among them, revenue from the study abroad business increased 18.5% year over year to 0.313 billion US dollars. Revenue growth was about 29.2 percentage points narrower than in the same period last year. We expect that with the gradual release of demand for study abroad accumulated during the pandemic, the compound annual growth rate of the company's study abroad business will return to the normal rate of 20.1% in the next three years.

The expansion of teaching sites has maintained a high increase. Due to the high increase in the number of trainers, we expect to open more than 50 new teaching outlets in 1Q, and the total number of teaching outlets will exceed 1,075, an increase of about 35.6% over the same period last year. The growth rate is close to 37% in the previous quarter, and the rapid growth of teaching outlets will continue. As a leading indicator of the number of trainees, we believe that the acceleration in the expansion of teaching sites indicates that the boom in demand is still on an upward channel.

The accelerated expansion of teaching outlets will drive an accelerated increase in the number of trainers and an acceleration in revenue growth. Furthermore, various provinces and cities have successively proposed speeding up the approval of non-subject training outlets, and we expect education and training supervision to gradually become normalized. We judge that at this stage, the approval of new teaching sites is still given priority to existing education and training institutions, so New Oriental with a national layout will have a more first-mover advantage.

The e-commerce business is gradually fading out. We expect 1Q to contribute about 0.22 billion dollars in revenue from Oriental Selection, accounting for 15% of revenue respectively, which is about 4 percentage points lower than 4QFY24's 19%. We expect the selection to be close to break-even, mainly due to the one-time cost of divesting the live broadcast room with Hui. We expect the profit margin of the company's e-commerce business to gradually stabilize, contributing approximately $0.77 billion to revenue in fiscal year 25, which will return to $0.022 billion. Corresponding revenue accounts for about 14.2%, and profit margin accounts for about 4.5%.

Maintain a buy rating. Since the industry is still in a boom cycle, despite the rapid expansion of the company's teaching outlets, benefiting from the tight supply and demand pattern, the profit margin of the company's education business continues to expand. We expect the Non-Gaap operating margin to expand 2 percentage points to 24.3% year over year in 1QFY25. The 1QFY25 Non-Gaap operating profit of the education business increased 44.9% year over year to $0.302 billion. We maintain our non-GAAP net profit forecast of 0.493 billion/0.672 billion/0.891 billion for fiscal year 25/26/27. Maintain the target price of $109.5 (HK$85.6; each ADR is equal to 10 common shares; Hong Kong stocks trade common shares), corresponding to a 35.8% increase in the current price (30.4% increase for Hong Kong stocks), maintaining the purchase rating.

Risk warning: Non-subject training supervision policies have been strengthened; overseas geopolitical factors have blocked overseas study visas, and business recovery has slowed down.