FY2024 Q4 Earnings Preview: We expect revenue of $1,128 billion, +31% year over year, at the upper limit of the 28-31% growth rate guided by the company. Expected income from studying abroad for exam preparation is +21% /high school +21% /non-subject literacy +59% compared to 19%/21%/63% expected by Visible Alpha. We estimate adjusted operating profit of $69 million and net profit of $770 billion. The adjusted operating profit margin is expected to be 6.1%, down 3 percentage points from the previous year. Of these, 1.4 percentage points come from the expansion of teaching sites and investment in cultural tourism, and 1.6 percentage points from Oriental Selection.
The progress of offline teaching site expansion was updated, with a 10% increase in the fourth quarter or month-on-month, reaching the previous target of +30% in FY2024. According to our statistics, as of May 31, New Oriental teaching points added 80+ month-on-month, with a 10% month-on-month growth rate. Among them, literacy +33/examination+26/international+23/future+2, the growth rate is in line with previous expectations (30% annual expansion, +6%/8% for 1/2/3 quarters respectively). By city distribution, new first-tier cities saw the largest increase in teaching sites (+33), followed by third-tier cities and below (+25). The expansion of teaching sites accelerated this quarter, and the impact on the company's overall gross margin was about -0.4 percentage points year-on-year, but it was mainly due to the July-August summer enrollment layout, which was beneficial to enrollment growth in the first quarter of FY2025.
Oriental Selection contributed 20% of New Oriental's revenue and had a negative impact of 1.6 percentage points on operating margins. This was within our expectations, and the impact was better than in the 3rd quarter. Oriental Select's revenue for the fourth quarter is expected to increase 58% year over year to 1.59 billion yuan (US$220 million). The third quarter was the company's strategic adjustment phase. After the Spring Festival holiday, it gradually returned to a normal operating rhythm, and the live broadcast was promoted more actively. We expect the company's profitability to improve in the fourth quarter compared to the third quarter. The adjusted operating profit margin was 166 million yuan, compared to 4% in the 3rd quarter. The gross profit margin rebounded from the 3rd quarter (up 7 percentage points), mainly due to weakening promotion of self-employed products and a decline in the share of self-employed products in the revenue structure. However, the operating profit margin still fell 12 percentage points year on year, corresponding to the negative impact of New Oriental's profit margin 1.6 percent year on year.
Prospects and valuations. For the 2025/2026 fiscal year, we expect revenue of 5.4 billion dollars/6.5 billion US dollars, growth rates of 25%/21%, operating margins of 14%/16%, respectively, and continuous optimization of profit margins. The main education sector is still growing healthily and steadily, with a price-earnings ratio of 25 times for the 2024 calendar year. Conservative principles do not take into account Oriental Selection Value Contributions, maintain a target price of HK$89/$116 per segment (SOTP), and maintain a purchase rating.