New Oriental Education & Technology Group FY22Q4 (2022-3-1-2022-5-31) earned $524 million, or about 3.535 billion yuan, down 56.8 percent from the same period last year, mainly due to the impact of terminating the after-school tutoring business of FY22 9 subjects in line with the policy. FY22 earned $3.105 billion, or about 20.949 billion yuan, for the whole year (2021-6-1-2022-5-31), down 27.4 percent from the same period last year.

The company's original university / going abroad and new cultivation of literacy and other business structure is gradually formed. The income of FY22 overseas examination preparation business increased by 6%, the income of overseas consulting business increased by 16%, and the domestic examination and training business of adults and college students increased by 30%. FY23 will continue to accelerate the development of the two original core businesses of overseas universities with the help of brand strength and operational ability.

In order to tie in with the policy, FY22 reorganizes its core business and operations, and the new business is expected to generate considerable revenue in FY23. Specifically, non-disciplinary tutoring services are carried out in 50 + cities, intelligent learning systems and equipment are adopted and tested in nearly 60 cities, all of which have received positive feedback from students, and the student retention rate has increased. Progress has been made in other businesses, such as study tours and research camps, teaching materials, digital intelligent learning solutions, and preparation for this exam.

In addition, the company's holding subsidiary New Oriental Education & Technology Group online (1797.HK) continues to expand its online education services for adults and college students; at the same time, it has set up an "Oriental selection" e-commerce platform within FY22 to sell products dominated by agricultural products, and has made remarkable progress in conducting live streaming activities on famous short video social platforms such as Douyin, which has been recognized by tens of millions of subscribers and members.

At the end of FY22Q4, the company's deferred revenue was $933 million, down 51.6% from a year earlier.

FY22Q4 has become US $248 million, with a gross profit margin of 52.7%, an increase of 4.9pct over the same period last year, and an improvement in 13.4pct compared with the same period last year. On the one hand, it is due to seasonal reasons, the proportion of Q4 overseas consulting business has increased; on the other hand, adjustments such as network closure and personnel downsizing are coming to an end in the first three quarters. FY22 has a full-year revenue cost of $1.754 billion and a gross profit margin of 56.5%, an increase of 8.9pct over the same period last year. The company expects FY23 gross profit margin and profit margin to continue to improve.

FY22Q4 sales and marketing rates were 18.3%, an increase of 2.3% over the same period last year; general and administrative rates were 54.6%, an increase of 12.6pct over the same period last year, of which total share-based compensation expenses increased by 42.9%.

FY22Q4's operating loss was $106 million; Non-GAAP 's operating loss was $76.865 million, down 6.5 per cent from a year earlier. FY22's full-year operating loss was $983 million, while Non-GAAP 's operating loss was $850 million.

The net loss of FY22Q4 is $189 million, or about 1.275 billion yuan, and the net interest rate of Non-GAAP is-36.1%. The net loss of Non-GAAP is $160 million, or about 1.079 billion yuan, and GAAP is-30.6%.

FY22 posted a full-year net loss of $1.188 billion, or 8.016 billion yuan, while Non-GAAP posted a net loss of $1.046 billion, or 7.058 billion yuan.

The company expects FY23Q1 (2022-6-1-August 31) to generate revenue of US $6.41-681 million, or about RMB 43-4.6 billion, which is the same as a decrease of 48% or 51%. FY23 is expected to make a profit for the whole year.

In terms of cash reserves, the company has maintained a steady cash flow in the process of restructuring. At the end of FY22Q4, the total amount of the company's cash and cash equivalents, term deposits and short-term investments was approximately $4.2 billion; most of the additional expenses arising from lease termination and layoffs related to the closure of the Learning Center have been absorbed in FY22.

At the same time, the company's board of directors authorized a repurchase plan for common shares on July 26, with a repurchase amount of up to $400 million for the period from July 28, 2022 to May 31, 2023.

In terms of operating outlets, as of May 31, 2022, there were 744 schools and learning centers, of which 107 were schools. The number of single-season schools and learning centres in FY22Q4 decreased by 103, and the total number of FY22 decreased by 925 in the whole year. The company expects the number of outlets to remain at current levels in the future and to hire more new employees.

Update earnings forecasts and maintain buy ratings

The company's financial report sends a positive signal that the operating resilience is strong or continues to be marginal. New Oriental Education & Technology Group's original overseas study preparation and consultation business, adult and college student examination training business accelerated development, Xintuo non-disciplinary training, intelligent learning system, travel and research camp and other business, as well as the holding subsidiary New Oriental Education & Technology Group online have made good progress; at the same time, most of the restructuring costs have been digested, the current cash reserves are relatively sufficient, the company expects FY23Q1 to gradually return to profitability, financial inflection point may appear.

Considering that the business adjustment of the company is coming to an end, the after-school tutoring business of Kmur9 discipline has been terminated, the development of the traditional business has been accelerated, and the new extension business is making good progress, we update and adjust our profit forecast, and the company's FY2023-25 revenue is expected to be $23.0,27.6 and 3.31 billion respectively (the original value of FY23 is $4.69 billion). The net profit of Non-GAAP is 2.0,2.50 and 320 million dollars respectively (the original value of FY23 is 570 million dollars), the EPS is 1.18,1.48,1.85 dollars per share (the original value of FY23 is 3.35 dollars per share), and the corresponding PE is 24.6x, 19.6x and 15.7x respectively.

Risk hints: the epidemic has led to lower-than-expected enrollment; new extension business development is not as expected; industry policy changes and other risks.