Recommended logic: In the short term, it is mainly disturbed by travel research, Oriental selection, etc. Our analysis. The company's recent stock price adjustments are mainly due to: 1) the FY25Q2 education and training business entering the off-season operating leverage effect is not obvious; 2) the cultural tourism business is off-season, and losses have increased due to operating leverage; 3) the price of the study abroad business is higher, which is affected by insufficient consumer confidence, and the company's revenue guidance for Q2 is slightly lower than expected. But we think:

1) The company's non-selection business maintained a revenue growth rate of more than 30%. Among them, the core business quality education is still expected to grow by 40-50%, high school training is still increasing by more than 20%, and the intensification of competition concerns in the market is not obvious. Currently, the industry is still being cleared, supply is insufficient, and profit margins are still expected to increase; 2) As one of the scarce nationalization leaders, the company is still actively expanding learning centers, and its market share continues to increase. The company's FY25-27 revenue is expected to be 5.013/6.129/7.356 billion dollars, corresponding growth rate is 16.2%/22.26%/20.02%; FY 25-27 net profit to mother is 0.421/0.612/0.794 billion US dollars, corresponding growth rate is 36.25%/45.09%/29.74%, corresponding FY25-27EPS is 0.26/0.37/0.49 dollars, closing price on December 6, 2024 HK$49.65 (US$1 = HK$7.78), corresponding to FY25-2724.7/17.1/13.1PE. First coverage, giving a “buy” rating.

Company Overview: A leader in diversified education, gradually improving after transformation

Comparing before and after the double reduction, we analyzed the company's changes: 1) education and training revenue and number of people have not returned to the highest level before the double reduction, but prices have recovered; 2) gross profit margin and net interest rate have all reached record highs, thanks to the increase in teachers' capacity utilization. 3) Operating indicators: The number of students and the number of training centers has yet to return to before the double reduction.

(4) Cultural tourism business, learning opportunities, etc. provide a second growth curve.

Industry Analysis: Beijing's Draft for Solicitation of Comments Launched

On November 6, 2024, the Beijing Municipal Education Commission and the Beijing Municipal Human Resources and Social Security Administration issued a draft for comments on the Public Promotion Law, which clearly establishes institutions to implement subject-related out-of-school training, which is approved by the district education administration department. Among them, those that use Internet technology to conduct online subject-related out-of-school training activities are approved by the municipal education administration department; the district education administration department will review and approve in accordance with the opinions of science, culture, tourism, sports and other departments at the same level.

Competitive advantages: Strong brand awareness advantages continue, and old and new businesses develop together (1) Brand advantage: As an educational institution for 30 years, New Oriental has obvious brand advantages, and educational institutions are not allowed to publicly promote after the double reduction. The company's previously accumulated private domain traffic+reputation can better attract students to sign up; (2) Content advantage: The company has been deeply involved in K12 subject training for many years, has a perfect teaching and research system and excellent teachers, and is more capable of developing quality education course content. (3) Channel advantages: After the double reduction, the retention rate of New Oriental outlets was high, and outlets were quickly laid out after the transformation to quality education. Currently, the number of schools and learning centers is 1,089, which has been restored to 65% before the double reduction. We believe that in the license issuance process, leading institutions have an advantage in running compliant schools, and it is expected that they will quickly return to the number of outlets before the double reduction. (4) It has a complete teaching team training system and the highest number of teachers in the industry; (5) The study abroad and adult education business provides a stable basic market.

Driven by growth: Rapid expansion of outlets, there is room for teachers to increase class volume and network area, and cultural tourism and learning opportunities provide new volume

(1) As of 2025Q1, the company had 1,089 schools and learning centers, only recovering to 65% before double reduction, and there is huge room for future expansion. (2) According to our estimates, after the double reduction, the company's learning center was profitable in the first year, benefiting from demand greater than supply after the double reduction. The full class rate, renewal rate, number of students per class, etc. all increased, and sales expenses, R&D expenses, etc. all declined. According to our estimates, the company is expected to achieve a net interest rate of 24% after the 1,200-square-meter store matures. (3) Accelerate the expansion of research and cultural tourism business, complement and develop together with online live streaming. (4) Intelligent learning machines combine quality education to provide additional volume.

Risk warning

Market competition risk; risk of network expansion falling short of expectations; risk of tuition fee increases and student enrollment falling short of expectations; risk of loss of management team and teaching staff; systemic risk.