New Oriental: How many more times will it take to exceed expectations and regain market faith?

Hello everyone, I'm Changqiao Dolphin.

On the morning of April 19, 2023, before the US stock market opened, $New Oriental.US disclosed its third-quarter financial data corresponding to December 2022 to February 2023.

Overall, New Oriental has turned in an over-performing report card: The over-performing aspect is not only the current performance, but also the guidance for the next quarter. This reflects the over-performing recovery of older businesses such as study abroad and adult English during last year's peak infection period, as well as the strong growth of new businesses such as quality education and live e-commerce.

Especially the revenue guidance for next quarter is better than expected. In addition to the obvious expansion in quality education, to some extent, it also dispels some concerns in the market about the continuous decline in the popularity of live streaming. Recently, the tourism account selected by Dongfang exceeded RMB 100 million in GMV in a special session in Zhejiang. With the arrival of the ecommerce peak season in the second quarter, the popularity of Dongfang's selection is expected to rebound.

As of now, New Oriental's pre-market gains have been erased, and Dolphin believes that there is no problem with the performance itself. However, as we mentioned in "Cash builds a strong foundation, Dong Yuhui cannot grasp New Oriental," the core reason for holding $4.3 billion in net cash but not surpassing a market capitalization of $8 billion is still due to doubts about the sustainability of Dongfang's live-broadcasting business, as well as fear and bias towards the education industry itself. Compared to the two factors, we believe that the expectation gap for the latter is greater. But changing one's mindset is not an overnight task; it requires continuous operational signals.

Therefore, from an investment perspective, we recommend focusing on the bottom value of $4.3 billion in cash and $1.5 billion in older businesses to find relatively comfortable opportunities in the short term.

Due to the operational performance of segmented businesses, there is little information disclosed in the performance report. Generally, management will make relatively detailed disclosures on conference calls, so we recommend that everyone pay attention to the upcoming conference call. We will also send the minutes of the conference call to the user group and the Changqiao App as soon as possible. If you are interested, you can add the WeChat account "dolphinR123" to get it.

The core data are as follows:

1. The rigidity of educational demand and the popularity of live e-commerce have brought in revenue that exceeded expectations: New Oriental's third-quarter revenue for the 2023 fiscal year was $754 million, significantly exceeding the previously guided range of $703 million to $720 million. The Q3 2023 group revenue has officially turned positive, and for next quarter's guidance, in the case of a low base, it has given a year-on-year growth of about 55%, with a revenue scale of $802 million to $823 million, far exceeding market expectations. （1）Demand backlog released in the short term, enthusiasm for studying abroad remains unabated: Originally, the market had some short-term concerns about the impact of last year's infection peak on offline courses. However, due to the rigid demand for education in Chinese families and some study abroad demand that had been stored due to inconvenient entry and exit over the past three years, it was concentrated and released in a short time.

In addition, the pressure of short-term employment market will also force more university students to choose to further their studies to avoid the current employment difficulties, among which studying abroad is one of the important ways to further their studies.

Therefore, in Q3, the overseas study preparation and consulting business increased by 13%/5% year-on-year, respectively, although the growth rate was somewhat slower than that of the previous quarter, considering the macro environment at the end of last year, this growth rate is still good.

（2）Parents' anxieties shifted, quality education steadily developed: The Dolphin has always said that quality education can take over some of the chicken anxiety that parents transfer from subject training, as well as reflect the natural improvement of educational demand. In the third quarter, New Oriental's quality education continued to expand steadily, with enrollment reaching 218,000, and the sequential decline was due to the off-season and the infection peak.

However, the number of schools and learning centers increased by 4 on a sequential basis in the third quarter, reaching a total of 712. From this data change, it is obvious that there is potential demand for quality education.

**（3）Revenue from online businesses such as live broadcasts, although the performance report did not provide detailed disclosure, but from the total revenue, live broadcasts may still be accelerating on a sequential basis. After all, there was a shopping festival at the end of last year, which is also easy to boost GMV.

2. In Q3, New Oriental achieved a pre-tax operating profit of USD 66 million, turning losses into profits year-on-year, with an operating profit margin of 8.8%, mainly due to the increase in income lifting the gross profit margin.

New Oriental's costs are relatively rigid, mainly for school and learning center rentals and equipment depreciation. Therefore, after the integration of school resources was completed in May last year and the opening rate of quality education classes improved, there was relatively greater elasticity of release for gross profit.

In addition, during the business adjustment period, the reduction in expenses was reflected after employee optimization. The current operating profit margin of 8.8%, compared with the normal historical level, still has room for improvement.

3. Improved operating cash flow and recovery of investment growth: With the continuous improvement of operating profit and improved operating cash flow, the company's capital expenditure has resumed growth, indicating that New Oriental has emerged from the shadow of business adjustments.