New Oriental: Repairs not yet completed, growth still ahead (3Q23FY earnings call transcript)

Below is the key information of the Q3FY23 earnings call for New Oriental.US. For financial analysis, please refer to "New Oriental: How Many Surprises Are Needed to Restore Market Confidence?"

I. Management Report

1. Revenue of Segment Businesses

(1) Overseas Test Preparation: 12% of revenue, growth rate of +13% in USD / +23% in RMB.

(2) Overseas Consultancy: 12% of revenue, growth rate of 5% in USD / +13% in RMB.

(3) High school: 28% of revenue.

(4) College English: 2% of revenue, growth rate of -3% in USD / +5% in RMB.

(5) New Education Business: 17% of revenue. Non-academic (comprehensive education) accounts for more than half, and learning machines account for the other half. The ratio of these two businesses is similar every quarter. Studying abroad has not yet contributed much revenue this year, but there are plans to generate several billion RMB next year.

The renewal rate for non-academic courses is over 70% (up from 60%+ last quarter), and the renewal rate for intelligent learning devices is 60%+.

(6) Oriental Selection: the main business in the remaining businesses.

2. Operating Profit Margin of Segment Businesses

(1) Overall overseas: 13-14% with higher rate for test preparation and 10% for study abroad consultancy. There is no need to worry about the profitability of overseas education. Although future US study abroad may be affected, the number of students studying in the UK exceeded that of the US last year. Strong demand for overseas education is expected to continue in at least the fourth quarter of this year.

(2) High school training: OPM 20-25%.

(3) College English: single-digit loss this year and profit next year.

(4) Overall OPM of new business is 10%. Future renewal will drive margin improvement.

Margin will increase for all businesses except high school next year.

3. Q4 Guidance

Revenue growth rate of 53-57% in USD and 65% in RMB. This is a relatively conservative estimate. The growth is due to the overall recovery of Chinese consumption and the fact that many comprehensive education online courses could not be conducted when everyone was infected last December and January, which also affected registration.

Another reason is that the Chinese New Year is relatively early this year. Some people who were supposed to register in Q3 actually registered in Q2 or delayed it to Q4. Therefore, we will see a strong rebound in March.

As a result, all business segments are expected to have accelerated growth compared to Q3. Deferred revenue will also increase significantly in March and April.

The overall Q4 profit margin is estimated to be 10%, which makes the full-year profit margin approximately 9%-10%.

4. FY2024 Guidance

(1) The initial guidance is a revenue growth rate of 20%+ for the entire company and a slight increase in operating profit margin.

(2) Overseas Test Preparation: Strong demand, supply outflow, optimized competitive environment, and obvious brand advantages make us optimistic about cash income. (3) Overseas consultation: performance has been managed well in the past two years without much decline due to a large base, so the growth rate guideline is 10%+. Keeping the profit margin stable is ideal.

(4) College English exam preparation: little has been done this year, but an increase of 20%-30% is expected for next year. This year there is a single digit loss of profit margin, expected to be around 5% operating profit margin for next year.

(5) Secondary school teaching and training: the growth rate remains at 10%+, with profit margin maintained or slightly improved.

(6) New business: expected to account for 18% or more next year, as demand is relatively strong. Quality education and study machines are doing well; education travel generated revenue in the tens of millions in RMB this year and will generate several hundred million next year, with growth rate tenfold.

(7) Oriental Selection: Q3 GMV declined normally. After a big explosion last year, the management has made great efforts to replenish the selection of products, quality control, logistics, and customer service, and we still have confidence in the future.

Analyst Q&A:

Q1: What is the expected increase in the number of branches and teachers and salary increase next year?

A: Preliminary estimates show a 10% expansion of branches and teachers, with an average wage increase of less than 5%, and rent may decrease.

Q2: What did Teacher Yu mean by investing heavily in cultural tourism?

A: Teacher Yu said to invest 5 billion, but we do not need to care about that. We have had a business in cultural tourism for many years and attracted 15-20 thousand overseas study tour students, with an income of 20-30 thousand yuan per person, totaling around 60 million yuan. But we have not done it in the past three years.

International study tours and domestic study tours will have many times growth in FY2024, so we are thinking about whether we can become tour guides, but it will not be like Ctrip or travel agencies, it will be more like knowledge sharing, similar to Oriental Selection. The inspiration comes from two successful attempts by Teacher Yu this year: explaining Tengwang Pavilion (ticket revenue increased significantly) and Chongli Skiing (live streaming to sell tickets and gained 8 million).

We have two advantages in doing cultural tourism:

First, the channel advantages, including 40 million fans of Oriental Selection, 10 million fans of Teacher Yu, 4 million fans of New Oriental live broadcast, more than 700 teaching centers across the country, and sales channels throughout China. Therefore, our channel influence has far surpassed that of ordinary education companies.

Second, teachers’ cultural heritage can bring a different experience to middle and high-income groups from children to the elderly.

The model will undoubtedly be asset-light, with New Oriental (EDU) as the main body. We are currently planning to try in 1-2 provinces. Many tourism bureaus have come to us, and we may expand from study tours to ticket splitting in the future.

However, it is still in the early stages, and there will not be much contribution to revenue in the new year.

Q3: What are the exchange rates for Q3 and Q4 financial reports?

A: The profit and loss statement for Q3 used 6.8698, and the balance sheet used 6.9325. The prediction for Q4 is 6.8803.

Q4: Did the business model of the study machine change from leasing + subscription?

A: We are trying to sell, but we don't just put the content into the device and leave it to the students to learn by themselves. The device is integrated with our teaching courses. It can be seen as renting a device and an account for students to log in to our teaching system, where they can access our teaching content, track their learning progress, and receive feedback from our customer service team who can also answer short 5-10 minute questions (the customer service team includes teachers).

Therefore, we are selling the "hardware + content + service" package to students. Currently, over 700 teaching centers are promoting the learning device, and it's mainly sold through teaching channels.

If there are no available slots for students to enroll in courses, we offer the device as an alternative. On average, each student takes 1.5-1.6 courses, with an ASP of $200-$250 per quarter per subject. In the future, we plan to expand our curriculum and increase student retention rates.

In theory, the margin for the learning device is similar to that of the courses. Although the price is 70-80% that of courses, we don't need to rent classrooms and one teacher can cover more students, so fewer teachers are required.

Q5: Will the learning device conflict with the courses?

A: No, the learning device is mainly for students in junior high school or higher, while the courses are mainly for primary school students. In fact, the demand for education in China is very high, and the market share of New Oriental and Xueersi is still small, so there is plenty of room for growth.

Q6: Is the demand for non-subjects coming more from top-tier cities or lower-tier cities?

A: The market share is growing in both top-tier and lower-tier cities, with strong demand in top-tier cities. We currently have teaching centers in 70-80 cities and can expand using our existing infrastructure.

Q7: Will it be more difficult to obtain approval for opening new teaching centers for non-subject courses compared to high school and study abroad courses?

A: The speed of obtaining licenses does not matter much, and we can increase capacity by expanding the rental area.

Q8: What is the utilization rate of teaching centers for non-subject courses?

A: We need to observe the utilization rate in the next quarter. December and January were empty in Q3, but the utilization rate will increase year-over-year. The utilization rate in Shanghai is high, and vacancy is not obvious, but currently, Shanghai accounts for less than 5% of our revenue, and many other regions are affected from December to January.

Risk disclosure and statement in this article: Longbridge Research's disclaimer and general disclosure