Third quarter of 2021: revenue is expected to exceed expectations despite weak profit margins
We expect New Oriental Education & Technology Group's revenue to grow 25% year-on-year in the third quarter of fiscal 2021 (as of February 28, 2021), 2% higher than Bloomberg's consensus forecast and above the company's performance guidance (19-24%). Among them, K12 business is expected to maintain a strong recovery, revenue is expected to grow 33% year-on-year; study abroad business is expected to improve, revenue decline in the third quarter may narrow to 20% from 47% in the second quarter. Affected by the increase in teacher subsidies and investment in OMO (online merging offline), we expect Non-GAAP 's operating margin to be 6%, down 8.6% from a year earlier.
Offline expansion and OMO outlook are the main highlights of New Oriental Education & Technology Group.
We expect New Oriental Education & Technology Group to set a performance guidance that is in line with or slightly lower than expected for the fourth quarter of fiscal 2021, mainly due to the pace of offline expansion and regulatory uncertainty about the outlook for OMO. The current consensus forecast for revenue growth in the fourth quarter from a year earlier is 39%. After taking into account the disruption of offline K12 business in March and the 8% depreciation of RMB against the US dollar since March 1, we expect revenue to grow by 38% in the fourth quarter compared with the same period last year. We believe that management's guidance on the company's offline expansion and OMO business progress in fiscal year 2022 is noteworthy.
Although the market is still waiting for the policy details to be landed.
The factors that may affect New Oriental Education & Technology Group in the future include: 1) whether it will limit the number of K12 extracurricular tutoring institutions related to schoolwork and stop issuing new practice licenses-it is possible that this will speed up the pace of industry consolidation (thus benefiting leaders), but it may cause some small and medium-sized institutions to operate illegally, contrary to the original intention of regulation. 2) it is unlikely that public schools will extend their teaching hours to Saturday, as we expect strong opposition from teachers, the local government and some parents. As the college entrance examination system has not been reformed and the competition for educational resources is still fierce, we believe that the market demand for extracurricular tutoring is unlikely to decline significantly.
. New Oriental Education & Technology Group's risk return is relatively high; due to the introduction of extracurricular tutoring policies, New Oriental Education & Technology Group's share price has been low since March 29 (down 13.7% on the day). The Hang Seng index rose 0.01 per cent on the day). We maintain a relatively positive attitude towards the company because the current market valuation has fully taken into account the impact of these extreme circumstances and there is limited room for the company's share price to continue to decline. Based on the 30 times PE (original valuation: 32 times) of the company's offline business in fiscal year 2022 and the current market capitalization of New Oriental Education & Technology Group online, we have a target price of HK $149under the segment valuation method. The company's current share price corresponds to 34 times Non-GAAP PE in fiscal year 2022, and our target price of HK $149implies 44 times Non-GAAP PE in fiscal year 2022, giving it an "overweight" rating.