New Oriental is a leader in China's education and training industry. After China implements the "double reduction" policy that aims to reduce homework and after-school tutoring pressure on primary and secondary school students, the Company has been proactively shifting to new businesses, including non-academic tutoring and ecommerce, as well as strengthening its legacy businesses of overseas test preparation and overseas study consulting, domestic test preparation targeting adults and college students, etc. With the combined efforts of both new endeavors and legacy businesses, New Oriental has turned a profit since FY1Q23, posting non-GAAP attributable net profit (ANP) of US$260mn in FY2023.Looking ahead, the Company's legacy businesses are likely to witness recovery-driven growth with the rise in demand in the short term, and its market share may continue to expand in an optimized competitive landscape in the long run. Meanwhile, its ecommerce, non-academic tutoring and other new businesses are growing rapidly to show continuous improvement, which will likely maintain the growth momentum in the next few years. Moreover, New Oriental's expansion in educational hardware, cultural tourism and other emerging business segments may also refuel growth in the long run. Overall, New Oriental has not only shown strength and resilience but also exhibited strong growth potential via successful business transformation. We are optimistic about the future development of the Company's various businesses and initiate coverage with a "BUY" rating by assigning a target market cap of US$11bn, equivalent to a target price of US$64/HK$51 for its ADRs and H-shares.
　　A leading education and training service provider showing strong resilience through the cycles:
New Oriental is a leader in China's education and training industry, and as a veteran in education in China for 30 years, its business has experienced many rounds of expansion across multiple cycles. Despite the negative impact of the "double reduction" policy in 2021, which led to the pestiture of academic training for K9 students (kindergarten through grade nine or secondary schools), its top revenue contributor back then, the Company quickly opted for restructuring. On the one hand, it consolidated the advantages of the legacy overseas test preparation and overseas study consulting business. On the other hand, it actively developed new education businesses, such as quality education, and ventured into live ecommerce and other fields. With the combined efforts of both new endeavors and legacy businesses, the Company has returned to profit since FY1Q23 and delivered non-GAAP ANP of US$260mn in FY2023, showcasing strong resilience.
　　Legacy businesses: High elasticity in the short term and m/s expansion thanks to the improved competitive landscape in the long term.
　　The Company's legacy businesses mainly include overseas test preparation and overseas study consulting, domestic test preparation targeting adults and college students, high school training and other businesses. The overseas study business is disturbed by Covid-19 in 2020-22, resulting in some demand being delayed. With easing Covid curbs in 2023, pent-up demand will likely emerge in the short term. Its overseas test preparation/overseas study consulting business revenue grew 52%/+6% YoY in FY4Q23, respectively.The domestic test preparation business targeting college students has also been disturbed by Covid curbs, which weighed on its business activities of offline training and on-campus customer acquisition in the past two years. But coming into 2023, this business is also likely to see recovery-driven growth on the whole. Looking ahead, we expect the market size of its legacy businesses to further expand along with the rising industry-wide penetration rate, while the exit of small and medium-sized institutions over the past few years has led to less competition in the market, creating an optimized competitive landscape.New Oriental, as a market leader in multiple segments, is well-positioned to further expand its market share thanks to its long-accumulated brand power, reputation, high-quality products, talents and organizational efficiency.
　　New businesses: East Buy and non-academic tutoring are growing rapidly, while educational hardware and cultural tourism are creating growth space.
　　After the "double reduction" policy, the Company followed two directions in transformation, non-academic tutoring and ecommerce, and both businesses have achieved excellent results after nearly two years of development. We estimate that East Buy, its livestreaming platform, posted gross merchandise value (GMV) of more than Rmb10bn in FY2023. It has already stabilized its position as a leading livestreaming platform on Douyin and is actively transforming itself into a brand, and its proprietary application has also achieved excellent performance. The non-academic tutoring business has also become an important growth driver in the new education business, with FY4Q23 enrollments totaling 629,000. The expansion of offline learning centers has begun to accelerate, and the number of such centers has grown by 36 QoQ to 748 in FY4Q23. The two businesses are still developing after experiencing rapid growth in the short term and are likely to consistently boost the Company's growth in the following years. In addition, the Company has also been actively developing new businesses, such as educational hardware and cultural tourism, which may also contribute to the Company's growth curve in the long term.
　　Potential risks:
The recovery of the overseas study market missing expectations; the development of new businesses not up to expectations; increasing competition in the industry; changes in education policies; the Company's brand reputation being damaged; the development of non-academic tutoring products falling below expectations; a decline in education consumption due to slower macroeconomic growth; exchanged rate fluctuations.
　　Investment recommendation:
In the short term, we are upbeat that New Oriental will benefit from the growth brought by the recovery of demand for its legacy businesses and the rapid growth of new businesses. In the long term, the Company's advantages as a leader in multiple segments are likely to be gradually reflected in its further market share expansion, while some of the new businesses may also contribute new increments to its growth. We forecast FY2024E-26E non-GAAP ANP of US$390mn/479mn/569mn. Under the sum-of-the-parts (SOTP) valuation framework, we incorporate the Company's stake in East Buy, its net cash & cash equivalents and the valuation of its education business (based on the PE/PS valuation of comparable companies, such as TAL Education Group (TAL.N), Gaotu Techedu (GOTU.N), and Youdao(DAO.N), which are trading at 1.12x/0.99x/0.58x 2024E PS, with Gaotu Techedu also trading at 9x 2024E PE), we assign a target market cap of US$11bn, corresponding to a target price of US$64/HK$51, and initiate coverage with a "BUY" rating.
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【免责声明】本文仅代表第三方观点，不代表本站立场。投资者据此操作，风险请自担。