Business transformation better than expected
? We hosted a conference call with New Oriental Education & Technology Group Inc.
(EDU), which indicated that its business transformation is better than we expected.
? We expect revenue from its overseas test prep and consulting business to grow by
high-single digits yoy in FY5/23F and account for about 30% of total revenue.
? EDU will focus on domestic test preparation, which management expected to provide
30–40% yoy segment revenue growth, accounting for 15% of revenue in FY5/23F.
? Upgrade to Add with new DCF-based TP of HK$21.0, since we believe EDU’s business
transformation is on a good trend, resulting in better margin expansion.
Reformation of the old business
EDU ended its K–9 after-school tutoring business on Jan 1, 2022. In EDU’s 1H FY5/22
results, it recorded about US$700–800m in one-off expenses for closing half to two-thirds
of its learning centers (about 600 centers remain open) and cutting over half of its staff
nationwide. Thereafter, learning center closings and staff cuts will be limited to local areas.
The remaining old businesses include 1) overseas test prep and consulting; 2) domestic
test prep; and 3) high school after-school tutoring, which management expects to
contribute about 70% of total revenue in FY5/23F.
Demand for overseas test prep and consulting business to recover
Revenue from overseas test prep is more sensitive to the pandemic situation, as students
for this business are usually less determined to study abroad than students for the
overseas consulting business. Revenue from the overseas consulting business has been
more resilient during the current pandemic. We expect the segment to return to fast growth
when the pandemic situation improves. Management expects the margin of the overseas
test prep and consulting business to be over 10% in FY5/23F.
Domestic test prep has great growth potential
EDU is expanding its course offerings from English tests for university students to cover
more vocational test prep business, like tests for college students to enter university.
Because of the weak job market and government support in developing vocational skills
among undergraduate students, we expect demand for EDU’s adult education business to
increase in the next few years. Management expects the margin of this segment to be over
10% in FY5/23F.
High school tutoring to closely comply with government policy
Since there is no nationwide policy guidance for high school after-school tutoring yet, EDU
is continuing this business following local government guidance. But EDU will not expand
this business and will closely watch specific policies of local governments. We expect the
high school tutoring business to account for 25% of FY5/23F total revenue.
Expanding new business in a prudent way
EDU is exploring various new businesses, leveraging its existing resources, and expects
new business to contribute about 30% of total revenue in FY5/23F. The new businesses
include 1) non-subject tutoring; 2) tutoring machines and systems; 3) study tours; 4) to B
business and 5) Koolearn’s new business, including live-broadcasting. We believe the new
business is still in the early stage and will take some time to bear fruit.
Upgrade to Add with new DCF-based TP of HK$21.0
We narrowed our FY5/22F net loss forecast by 11.8%, changed our FY5/23F net loss
forecast to net profit, and raised our FY5/24F net profit forecast by 33.8% to factor in better
margin expansion. We upgraded our rating to Add and adjusted up our TP to HK$21.0 (risk
free rate: 3.0%, beta: 1.1, WACC: 10.9%) since EDU’s business transformation progress
is likely to be better than we expected. A key positive catalyst is better cost control and
stronger growth of new business. A key risk is further policy changes.