FY24Q3 achieved revenue of $1.21 billion year over year, an increase of 60% year over year, exceeding the consensus expectations of the Bloomberg market.
Adjusted net profit of US$120 million was slightly lower than Bloomberg's unanimous market expectations and maintained a “Highly Recommended” investment rating.
The education business continues to grow healthily, and production capacity continues to expand. By the end of February 2024, the number of schools and learning centres increased by 68 to 911 month-on-month. During the results meeting, the company guided FY24 to raise the growth rate of the number of learning centers to 30%, or 967. To support the recovery of major businesses, the company will continue to invest resources in developing the OMO system. By business, study abroad and consulting services achieved year-on-year growth of 52.6%/25.7%, respectively.
The domestic examination business for adults and college students increased by 53.2% year over year. In terms of new business, the company's non-disciplinary business was carried out in 60 cities, and the number of applicants was 36,000. The number of active paid users of smart learning systems and devices per quarter was 88,000.
The profit margin of the education business continues to expand, and in the short term, it is slightly affected by the decline in gross margin of the self-operated live streaming business.
FY24Q3 achieved gross profit of US$550 million, corresponding to a gross profit margin of 46.6%, a year-on-year decrease of 4.4 pcts.
FY24Q3 achieved adjusted net profit of US$140 million, corresponding to an adjusted net interest rate of 11.7%, which was the same as the previous year. Costs are mainly affected by the increase in costs and expenses related to Oriental Select's proprietary products and live e-commerce business, including multi-platform strategies and supply chain control. The expansion of operating profit margins in the education business is mainly benefiting from the increase in the utilization rate of learning centers and the continuous optimization of the cost structure.
At the industry level, in February '24, the Ministry of Education issued the “Regulations on the Administration of Out-of-School Training (Draft for Comments)”, which aims to standardize out-of-school training activities, improve the quality of out-of-school training, and promote out-of-school training as a useful complement to school education. The opinion draft complies with the Education Law, the Compulsory Education Law, the Private Education Promotion Law, the Law on the Protection of Minors, and the “Opinions on Further Reducing the Workload and Out-of-School Training Burden of Students in Compulsory Education” issued by the Central Office and the State Administration. We believe that the gradual refinement of policy regulations will help further reduce the compliance and policy risks of leading institutions and mitigate valuation suppression caused by policy risks.
Maintain a “Highly Recommended” investment rating. We expect the company to benefit from brand advantages and continue to recover rapidly after the transformation. Short-term profit margins may be under pressure due to the promotion of proprietary products and staff wages in the live streaming business, but the profit margin of the education business continues to expand. As the red line of non-disciplinary supervision continues to be clarified, we are optimistic about the company's ability to quickly recover as a leading enterprise in the industry. We raised FY24-26 revenue to US$42.2/53.8/6.54 billion (original value of 39.5/49.7/6.12 billion yuan) and lowered adjusted net profit to US$4.3/6.4/82 billion (original value 5.3/6.8/8.4), maintaining the “Highly Recommended” investment rating.
Risk warning: New business development falls short of expectations, regulatory risks, public opinion risks, corporate governance risks.