Key points of investment

New Oriental announced FY2024Q3 results: Revenue increased by 15%-18% compared to the company's guidance growth rate 1) FY2024Q3's revenue was 1.21 billion US dollars, up 60% year on year, higher than the 42%-45% year-on-year growth range of the company's second quarter guide. Apart from the continued recovery in the education business, Oriental Selection showed a high increase in GMV and revenue this quarter, driven by self-operated brand day and launched with Huixing. This is the main reason why the revenue side exceeded expectations this time.

2) FY2024q3non-GAAP operating profit and margin were US$141 million and 11.7%, respectively; FY2024q3non-GAAP net profit and profit margin were US$105 million and 8.7%, respectively. The profit side of this quarter was mainly affected by discounts on Oriental Select's own products. We estimate OPM for the education business this quarter, and expect an increase of 5-6 pcts, maintaining a good recovery trend.

Demand in the education business is strong, and new businesses are growing rapidly

1) Strong growth in the original education business, continued interpretation of clear supply and demand resilience: Overseas exam preparation and overseas consulting services showed a good recovery since FY23. Preparation for the FY24Q1-FY24Q3 overseas exam was +51.7%/+46.5%/+52.6%, respectively, and overseas consulting +26.6%/+31.7%/+25.7%, respectively.

Domestic exam preparation services for adults and college students also maintained relatively rapid growth. FY24Q1-FY24Q3 was +25.5%/+42.7%/+53.2%, respectively.

2) The new business is growing rapidly, with broad development space and a clear growth path (we estimate that the size of the non-subject training market is expected to reach 463.66 billion yuan in 2025, CAGR = 23% in 22-25): FY24Q1-FY24Q3 education-related new business revenue was +103.3%/+68.3%/+72.7%, respectively; the number of registrants for the non-disciplinary tutoring business FY2024Q3 was about 355,000, +63% year over year (+47%/+65% for FY24Q1-Q2); intelligent learning There were approximately 180,000 active paying users of FY2024Q3 systems and devices, +74% year-on-year (+38%/+68% for FY24Q1-Q2).

3) Cultural tourism: Benefiting from a recovery in travel demand. New Oriental has further strengthened its cultural tourism business, reused ground education bases and teacher resources, and launched study tours and research camps in more than 50 cities across the country. The top 10 largest cities in China contributed more than 55% of revenue to this business.

4) Oriental selection: content+product two-wheel drive, profit margins are under pressure. According to data from Grizzly Dolphin and Flying Melon, we estimate that the total GMV of Dongfang Selected FY2024Q3 increased 70% + year over year, and revenue more than doubled year over year, mainly driven by self-operated brand day and the launch of the same broadcast with Huihui. Affected by discounts on proprietary products, Oriental Selection's profit margin was put under phased pressure.

Network expansion is accelerating, and the number of learning centers is expected to increase by 30% throughout the year 1) The number of FY2024Q3 schools and learning centers is 911, and the number of FY23Q4-FY24Q3 is 36/45/50/68, respectively, over the previous month, showing an accelerated expansion trend. According to the New Oriental results conference, the company previously expected the number of schools and learning centers to increase by about 20% throughout the year. This quarter, the guidelines were raised to 30%, mainly to open more learning centers or expand classroom space in existing cities. Along with the optimization of the competitive environment, it previously took 12 months to open a new learning center to balance income and expenses; currently, it only takes half a year.

2) In response to the market's concerns about whether the competitive environment is worsening, we believe that the current effective supply of literacy training is still limited, and the industry is showing a mismatch between supply and demand. We have compiled non-subject registration courses and found that most of them are specialty courses, and literacy courses such as thinking, humanities, and science account for a low proportion. (Note: For details, please refer to the Outreach Report “K12 Education and Training Transformation in the Education Industry Series: Good Scenery is in the Middle of Spring, and Peaches Are Still Rare”)

FY2024 Q4 outlook: Strong momentum, revenue growth remains relatively rapid, and New Oriental expects total revenue for the fourth quarter of FY2024 to be between US$1,101.5 billion and US$1,127.3 billion, up 28% to 31% year over year; the guided growth rate in RMB is 34% to 37%.

According to the New Oriental Results Conference, in terms of business in the fourth quarter of fiscal year 2024, revenue from overseas exam preparation and overseas consulting services will increase by about 15% to 20%; domestic exam preparation business revenue for adults and college students will increase by 20% to 25%; and revenue from new education businesses will increase by more than 60%.

Regarding profit margins for the fourth quarter of FY2024, we estimate that the education business will still be affected by Oriental's proprietary discount campaign, and the education business will remain unchanged year over year during the off-season; looking forward to the future, we believe that the competitive environment is optimized with clear supply and better demand, and the path to repairing the profit margin of the education business is still clear.

Profit forecasting and valuation

As a leader in the domestic education industry, New Oriental's business growth potential is still strong. We expect New Oriental's FY2024-FY2026 net profit to reach 347/498/689 million US dollars respectively, corresponding PE is 36.9x/25.7x/18.6x respectively; non-GAAP net profit to mother is 437/603/789 million US dollars, and corresponding PE is 29.3x/21.2x/16.2x respectively, maintaining a “buy” rating.

Risk warning

New business development falls short of expectations, industry competition intensifies, and macroeconomic fluctuations affect consumption