Key investment points: Detailed answers to all the questions that the market has been concerned about since the rebirth of Nirvana, a leader in education and training.
How have industry policies and regulatory enforcement changed? Since the announcement of the double reduction policy in July 2021, the concept of reducing the burden on students has not changed. The implementation level is gradually standardized, involving various aspects of control such as fund control, filing and supervision of training content, advertising, business hours, price guidance, and fund supervision.
Judging from tracking and observation at the implementation level since the implementation of the policy, penalties against offending agencies and the addition of new compliance licenses have coexisted, further confirming that double reduction is not a ban but rather guides the industry towards standardized development.
How can the innovative model after the double reduction support the recovery of performance? 1) Additional application scenarios for quality education and teaching content. On the demand side, due to the focus on “teaching people to fish”, it promotes school performance; on the supply side, the supply of high-quality courses is scarce, and the course content and teaching model have been recognized by students and parents since business transformation; in terms of cost performance, large institutions have advantages in teaching and service quality, rapid iteration, and course pricing compared to individual studios due to the strong teaching and research capacity and scale effects of the headquarters. 2) Rental learning machines conform to the continuity of online education habits during home study. The product content has accumulated many years of teaching experience at New Oriental, provides learning model solutions combining teachers' questions and academic reports for parents, learning machines, and hosting services, and provides diversified services at the supervisory level.
How do you view the market space of each education business? 1) Demand continues to be compounded by the scarcity of high-quality supply. The results of curriculum transformation in leading institutions have been recognized, and demand for non-subject training products is still strong. It is expected that the increase in participation rates and customer unit prices will jointly drive the expansion of the quality education market to 951.9 billion yuan by 2025. 2) The appeal of studying abroad rebounded after the public health incident, and the study abroad training market is expected to reach 13% CAGR in 2023-2025. 3) The general admission rate has declined, college entrance examinations continue to be intense, and new supply is relatively limited. The CAGR for the high school training market is expected to be 7% in 2023-2025. 4) The actual registration ratio for postgraduate studies is close to 6. The increase in participation rate is expected to drive the postgraduate training market to reach 10% CAGR in 2023-2025.
How has the business environment and competition in the industry changed? The supply and demand structure has been optimized, and the operating efficiency of leading companies has been optimized compared to before the double decline. Under the premise that the number of New Oriental outlets only recovered to 55% of the peak period, FY24Q3's revenue in a single quarter has surpassed the same period before the double decline to reach 8.6 billion yuan/1.2 billion US dollars, and gross margin is close to the same period before the double decline. Operational optimization mainly comes from price increases, multiple categories, and increased stickiness leading to an increase in LTV for a single user, a reduction in customer acquisition costs due to prohibited advertisements, and a reduction in operating costs and expenses due to optimization of remuneration and rent.
Are there any overseas industry development history benchmarks? Since South Korea's demographic trends and level of education resources are similar to China's, take South Korea as an example to review changes in the out-of-school training supervision policy, from strict prohibition to precise management, and ultimately pointing to fairness and quality improvement. The ideas are different and the same as the goals of China's double reduction policy; the decline in the school-age population but the increase in market size is driven by an increase in the participation rate and increase in per capita expenditure.
Profit forecast and investment advice: The company's FY2024 - FY2026 revenue is expected to be US$43/57/ 7.1 billion, non-GAAP operating profit of US$5.19/ 7.22/ US$962 million, and GAAP net profit to mother of US$382/6.14/8.27 million. Segment valuation method: 1) FY2025's new education business non-GAAP operating profit is expected to be HK$6.08 billion, with reference to 20 times the target PE, corresponding to a market value of HK$121.4 billion; 2) Dongfang Selected Market Value of HK$19 billion as of May 15, 2024, corresponding to a market value of HK$10.4 billion based on New Oriental's shareholding ratio of 54.89%; 3) Net cash at the end of the latest fiscal quarter is HK$37.2 billion, giving 0.9 times PB, corresponding to a market value of HK$33.5 billion. In summary, New Oriental FY 2025 was given a total target market value of HK$165.2 billion and a target price of HK$100. For the first time, coverage was given a “buy” rating.
Risk warning: Regulatory policies are becoming stricter again, macroeconomics are affecting training needs, institutional expansion is falling short of expectations, and industry competition is intensifying.