Goldman Sachs released a research report stating that it will maintain a Buy rating on NEW ORIENTAL-S (09901), with a Target Price raised to HKD 42 based on the sum-of-the-parts valuation method (SOTP). If the company can achieve the profit margin expansion guidance for the May quarter, it is expected that investor confidence will gradually improve, and the valuation multiples of New Oriental's core business will gradually rise from the current 1-time 12-month forward PE.

The bank gained confidence from New Oriental's February quarter earnings report conference call, where management emphasized the focus on cost control and the improvement of Operation efficiency and anticipated an expansion of the operating profit margin (OPM) for New Oriental's core business in the May quarter and fiscal year 2026. Although the revenue growth guidance for New Oriental's core business for the May quarter (12-15% year-on-year in RMB) and fiscal year 2026 (14-15% year-on-year) did not bring any unexpected surprises and aligned with Goldman Sachs' expectations, the bank raised its non-GAAP operating profit expectations for the core business for fiscal years 2025-2027 by 7-14%.

The bank believes that the company's cost control measures, combined with the increasing proportion of mature learning centers, should offset the drag on profit margins from overseas exam training and consulting businesses. It expects a year-on-year increase of 1.2 percentage points in non-GAAP operating profit margin for the fourth quarter of fiscal year 2025 and increases of 0.8 and 0.4 percentage points for fiscal years 2026 and 2027 respectively, driving a compound annual growth rate of 18% for New Oriental's core business operating profit for fiscal years 2025-2027 (while the compound annual growth rate of core business revenue is 12%).

For Orient Group Incorporation, the revenue and EPS for the February quarter did not meet expectations, primarily due to: 1) EAST BUY (01797) revenue significantly underperforming expectations (decreasing by 59% year-on-year), and profitability also not meeting expectations (Goldman Sachs expects the adjusted operating profit margin/net profit margin to be about 2%/5%); 2) Cash transfer pre-tax leading to higher-than-expected income tax.

Although the bank further lowered its expectations for EAST BUY for fiscal year 2025 and reduced the Target Price based on the PE to HKD 7.8 (previously HKD 8.2), it believes that EAST BUY will start to restore profitability from the February quarter, which means that the drag on profits for Orient Group in the May quarter will decrease, and starting from the August quarter, it will begin to contribute to the group's profit growth.