New draft regulation for after-school tutoring
- China’s Ministry of Education on 8 Feb issued a draft regulation aiming to formalise the after-school tutoring industry.
- We believe this draft regulation could alleviate the policy overhang on the industry. ? We expect it to benefit after-school tutoring players, such as New Oriental, as they
- would be able to expand their high school academic tutoring businesses.
- Reiterate Add with an unchanged DCF-based TP of HK$78.8 (WACC: 10.9%, TG: 3%).
Favourable new draft regulation for after-school tutoring
China’s Ministry of Education on 8 Feb issued a draft regulation aiming to formalise the after-school tutoring industry. The draft regulation clarified various aspects of after-school tutoring, from licensing and scheduling to pricing and penalties. We believe this draft regulation could alleviate the policy overhang on the after school tutoring sector. The key points in the draft regulation include 1) academic tutoring agents for compulsory education (Grades 1-9), i.e. primary and middle schools, should be non- profit entities, 2) the monitoring segment for academic tutoring only refers to compulsory education, and
does not mention high school education, 3) non-academic tutoring agents, like arts and sports, are encouraged to apply for licences, and 4) academic after-school tutoring sessions must be scheduled outside of regular school teaching hours and should not be conducted during national statutory holidays, weekends, and/or summer/winter vacations. However, there is no time requirement for non-academic tutoring.
This regulation should benefit New Oriental
We expect this draft regulation to benefit after-school tutoring players, such as New Oriental, as they would be able to expand their academic tutoring for high school and non-academic tutoring businesses. During 2QFY5/24, the academic tutoring business for high school accounted for over 20% of New Oriental’s revenue with c.10% yoy growth, and for FY5/24F we expect the revenue contribution to improve to 20-25%. In addition, New Oriental’s non-academic tutoring business has penetrated 60 cities, attracting 786k student enrolments (vs. 438k student enrolments in 1QFY5/24), with over 65% retention
rate. Management targets to expand its learning centre capacity by 20% yoy in 3QFY24F. We expect New Oriental’s full-year revenue and net profit growth to reach 38% and 79% yoy (in US$ terms), respectively, for FY5/24F.
East Buy is likely to achieve solid growth in FY5/24F
New Oriental’s 55%-owned unit, East Buy’s (1797 HK, Add, TP: HK$44.5, CP: HK$23.2) top influencer, Dong Yu Hui, closed his Weibo account on 27 Feb 2024, which could lead to short-term volatility in East Buy’s share price, in our view. However, we do not expect this event to impact Dong Yu Hui’s public image and number of fans. East Buy said it will continue to grow its own app and private-label product offerings, and maintain its position in different livestreaming platforms (e.g. Douyin, Taobao). We expect East Buy’s revenue to rise 35.7% to Rmb6.1bn and adjusted NP to grow 8.5% to Rmb768m in FY5/24F, accounting for 21% and 36% of New Oriental’s revenue and adjusted NP.
Reiterate Add with unchanged DCF-based TP of HK$78.8
We reiterate Add on New Oriental, as we believe New Oriental has ample room to grow its existing business and expand its new initiatives. We have noted strong education business demand, and the new draft regulation on after school tutoring should provide an opportunity for New Oriental to expand its high school academic tutoring and nonacademic tutoring businesses. Key positive catalysts: stronger revenue growth and margins in 3QFY5/24F. Key downside risks: 1) further policy changes, which could constrain its revenue growth, 2) increased competition affecting its overall margins, and 3) the failure of some new initiatives.
