EAST BUY: The reversal logic of new and old businesses is gradually being realized.

$ New Oriental EDU & Tech(EDU.US) released its performance for the last quarter of the 2023 fiscal year before the US stock market opened on July 26th, Beijing time.

Overall, the results exceeded expectations mainly in terms of revenue. This indicates that both traditional businesses such as studying abroad, adult English, and high school subjects, as well as new businesses such as quality education and study tours, have high market demand after the epidemic, which is why the company has chosen to continue accelerating its expansion pace.

However, in the second quarter, the higher expenses related to live e-commerce resulted in much weaker operating profit for the group than market expectations (BBG). However, Dolphin noticed that although the actual expenses still exceeded expectations, the difference was not as much as BBG's expectations.

At the same time, it must be acknowledged that as a live e-commerce business model that is clearly inferior to education, it is not worth excessive investment. Regarding expenses, you can see how the management explains it during the conference call.

In addition, the company has extended the deadline for the approved share repurchase plan in 2022 by 12 months, but the total repurchase amount has not increased. As of July 25, 2023, the company has repurchased approximately 5.9 million shares, with a total expenditure of $192 million, at an average price of $32.5 per share.

Dolphin's Viewpoint

New Oriental has always been a small stock that Dolphin is optimistic about in the long run, and the core logic comes from the rigid domestic demand for education, the company's years of experience in the industry, and the execution power of the management team.

However, compared to new businesses such as quality education and study tours, we do not have high expectations and valuations for the live broadcasting business. Education is also a slow business, especially after entering a new field, it takes years to gradually realize its value. Therefore, although New Oriental has abundant cash on hand ($4.5 billion), our neutral to slightly optimistic valuation for the overall group of New Oriental is in the range of $7-9 billion (refer to "Cash Builds a Solid Foundation, Dong Yuhui Can't Grasp New Oriental"). The current market value is close to the upper limit of Dolphin's valuation range.

If the new businesses can gradually break the market's cognitive bias and truly contribute meaningful performance starting from the 2024 fiscal year, it is also expected to provide more effective support to the valuation.

Due to the limited information disclosed in the performance report regarding the operating performance of specific business segments, the management usually provides relatively detailed disclosures during the conference call.

!Automatically generated table description

The core data is as follows:

1. Without subject tutoring, parents' enthusiasm for education remains high

New Oriental's revenue for the fourth quarter of the 2023 fiscal year was $861 million, significantly exceeding the previous guidance range of $802 million to $823 million. For the next quarter's guidance, the company expects an average year-on-year growth of around 80% on a lower base, with revenue ranging from $983 million to $1.006 billion, far exceeding market expectations (around $950 million).

Among the revenue of segmented businesses, ...

The expansion of the education business reflects the high enthusiasm of parents and students for education after the epidemic, which is intuitively reflected in two indicators:

(1) In terms of the number of newly built learning centers, there were a total of 748 learning centers at the end of the fourth quarter, with a net increase of 36, exceeding the market's expansion expectations (around 720).

(2) In addition, deferred revenue also reflects prepaid tuition fees and subscription fees for intelligent learning devices, which can also be used to observe current market demand. Deferred revenue for the fourth quarter was $1.338 billion, a year-on-year increase of 43%.

In addition to the education business, according to Feigua data (CICC statistics), the GMV of Oriental Selection live broadcast rooms from March to May was 2.4 billion yuan, corresponding to a daily average transaction volume of about 27 million yuan, a slight decrease compared to the previous quarter. Since the complete data for the 618 period is not included in the financial report period, it reflects the situation of the current quarter being the off-season for live broadcasts.

2. Expenses exceeded expectations, and investment in live e-commerce increased sharply

New Oriental achieved a pre-tax operating profit of $48 million in Q4, continuing to turn losses around on a large scale compared to the same period last year, but the operating profit margin was only 5.5%, significantly lower than expected.

The gross profit margin improved compared to the previous quarter, as the increase in school enrollment rates helped spread more fixed costs.In the process of gradually emerging from the pain period of K12 subject tutoring in the education industry, the possibility of rapid expansion in the short term is not high.

However, due to the relatively large short-term growth rate, it is worth paying attention to the specific statements of the management during the conference call.

4. Improvement in operating cash flow, continued stable investment

The improvement in operating profit directly leads to a further increase in operating cash flow. At the same time, the company is accelerating the construction of new learning centers and steadily increasing capital expenditures. New Oriental's free cash flow in the fourth quarter reached a new high of $353 million, reflecting the cash flow advantage of the education business under normal operations over the past year.