Event: The company announced FY2025Q1 (i.e. June-August 2024) quarterly results. Total revenue for FY2025Q1 increased 30.5% year over year to 1.44 billion US dollars; total revenue excluding Oriental Select and Live streaming e-commerce increased 33.5% year over year to 1.28 billion US dollars, in line with performance guidelines. Operating profit increased 42.9% year over year to 0.29 billion US dollars; operating profit excluding Oriental Selection and Live Streaming e-commerce increased 58.4% year over year to 0.3 billion US dollars, and operating profit margin increased 3.7 pct to 23.7% year on year. Net profit to mother increased 48.4% year over year to $0.25 billion; non-GAAP net profit increased 39.8% year over year to $0.26 billion. Net operating cash inflow was $0.18 billion and capital expenditure was $80.2 million.

Revenue reached the target for nine consecutive quarters. Among them, the new education business continued to grow strongly, and revenue from the cultural tourism business grew rapidly. From FY2024Q1 to FY2025Q1, the company's revenue reached the target for nine consecutive quarters. By business: FY25Q1 overseas exam preparation and overseas consulting business revenue increased 18.8% and 20.7%, respectively; domestic exam preparation business revenue for adults and college students increased 30.4% year on year; revenue from the new education business increased 49.8% year on year. Revenue from the new education business continued to grow at a high double-digit rate during the quarter. Among them, the non-subject tutoring business launched non-subject tutoring services in nearly 60 cities, and the number of registrants increased 11% year over year to 0.484 million; the slowdown was mainly due to the earlier start of summer enrollment. If the two quarters of FY24Q4 and FY25Q1 were combined, the total number of non-subject tutoring registrations was 1.36 million, an increase of 27% over the previous year. Intelligent learning systems and devices were used in about 60 cities this quarter, and active paying users increased 77% year-on-year to 0.323 million in the quarter.

Profit margins are under phased pressure, and I am optimistic that the profit margins of newly opened outlets will gradually improve. FY2025Q1's gross margin fell 1 pct to 59% year on year, and the non-GAAP operating profit margin fell 1 pct to 21% year on year. The decline in profit margins was mainly due to investment in cultural tourism business, influence of Oriental selection, and the opening of new outlets required a period of time to rise in profit margins. As of 2024/8/31, the total number of schools and learning centers was 1,089, an increase of 64 compared to 2024/5/31, and an increase of 296 compared to 2023/8/31. The company expects the total number of schools and learning centers to grow by 20% to 25% throughout FY2025.

We believe that the profit margin of the education business is expected to increase as network utilization increases, and we remain optimistic about long-term profit margin improvements.

Profit forecast and investment rating: The company's education business revenue is in line with expectations, and profits are under phased pressure, mainly due to the drag of cultural tourism business and e-commerce business, as well as costs caused by the rapid opening of outlets in the early stages. We lowered the company's FY2025-2026 non-GAAP net profit from $0.5/0.61 billion to $0.49/0.6 billion, and maintained FY2027 non-GAAP net profit of $0.72 billion. The current stock price corresponds to FY2025-2027 PE (non-GAAP net profit caliber) of 22/17/15 times, respectively (according to the 2024/10/28 USD to HKD exchange rate) 7.7733 conversion). We believe that as the profit margins of the company's outlets gradually rise and the scope of OMO applications expand, it is expected to drive a gradual improvement in overall profit margins and maintain a “buy” rating.

Risk warning: talent loss and brand reputation risk, competition in the education industry exacerbates risks, new business development falls short of expectations