With the implementation of education and training supervision, is New Oriental EDU & Tech making a comeback as the king?

Market clearance, the end of education and training supervision, and the dulling of negative news have seen leaders in the sector such as New Oriental EDU & Tech (09901) and TAL Edu (TAL.US) breaking out of a trend-driven bull market.

As we all know, the education industry is highly sensitive to policies, and the significant fluctuations in the sector in recent years are all policy-related, with the market always being the first to anticipate. In the case of the education and training industry, the "double reduction" policy was introduced in July 2021, but the sector had been declining for half a year, with valuations halved. After the policy was implemented, it hit rock bottom within just a month, and then spent nearly a year exploring the bottom before starting to reshape valuations in June of the following year. However, there has been a clear trend in the sector, as seen in the case of New Oriental EDU & Tech in the Hong Kong stock market, where the market has recovered, with its market value increasing more than 6 times.

Zhitong App has learned that the Ministry of Education recently issued a public notice seeking opinions on the "Regulations on the Management of Extracurricular Training Institutions (Draft for Solicitation of Comments)", with the deadline for comments set for March 8, 2024. In fact, after the market clearance following the "double reduction" policy, which exceeded 90%, the sector's transformation has been completed. The policy implementation has turned out to be favorable for the industry, coupled with the strong overall market performance, individual stocks in the education and training sector have recorded decent gains in the first week after the holiday.

It is worth noting that the valuation recovery in the education and training industry is not even half complete yet. While the leading company New Oriental EDU & Tech has seen a significant increase in its stock price, it has only recovered 45% from its previous high. The company's transformation into live streaming e-commerce has been the most significant among its peers, with its performance revenue reaching a historical high. Therefore, the question remains whether it can maintain its upward trend in the future.

Education and training supervision implemented, industry reshuffled after six years

Education is the foundation for building a country with a strong talent pool, and K9 education is the basis of the entire education system. Over the years, due to the existence of "exam-oriented education" and the competitive environment where no one wants to fall behind at the starting line, the education and training sector has been given a significant market space. The education and training sector has also increased the pressure on learning, making it a focal point for education reform. In fact, around the time the draft was submitted in 2018, the government issued a series of policies targeting the K9 education and training industry.

Looking at the policy timeline, from the February 2018 "Notice on Effectively Reducing the Extracurricular Burden of Primary and Secondary School Students and Launching Special Governance Actions for Extracurricular Training Institutions", to the July 2021 "Opinions on Further Reducing the Homework and Extracurricular Burden of Compulsory Education Stage Students", and then to the March 2022 "Announcement on Regulating Non-Subject Extracurricular Training", the August 2023 "Interim Measures for Administrative Penalties for Extracurricular Training", and finally to the February 2024 "Regulations on the Management of Extracurricular Training Institutions (Draft for Solicitation of Comments)", the regulatory policies have become increasingly clear.

The "Regulations on the Management of Extracurricular Training Institutions (Draft for Solicitation of Comments)" focuses on standardizing opinions on school permits for training institutions, subject/non-subject classification, training time, pricing, qualifications of teaching and research personnel, and filing of training materials. In practice, it has already been fully implemented, providing a more relaxed environment to the market. It actively guides in the areas of high school training and non-subject training, potentially bringing development opportunities to the industry. After six years of policy reshuffling, the education and training industry has basically been cleared out. From the data perspective, the number of online and offline education and training institutions has significantly decreased before and after the "double reduction." According to the research report from Northeast Securities, before the double reduction, there were 124,000 offline and 263 online education and training institutions. By the fourth quarter of 2022, the numbers had dropped by over 96% and 87%, respectively. The mainstream direction of transformation in the education and training industry is focused on college entrance examination preparation, vocational training, and quality education, including art training and interest tutoring. The industry leader, New Oriental EDU & Tech, has pursued a diversified path, seizing the trend of live streaming sales.

Steady Performance Recovery, Transforming into Live Streaming Sales to Create Top IP

Under the leadership of Yu Minhong, New Oriental EDU & Tech has shown rapid policy response and execution capabilities. After the double reduction policy was introduced, the company officially announced the complete termination of K-9 subject-based extracurricular training business in October of the same year. They began seeking new growth drivers, including traditional business transformation and exploring new businesses. The traditional business has shifted its focus towards overseas study tours and adult education. In December 2021, they entered the live streaming sales business with "Oriental Selection." In July 2023, they ventured into cultural tourism with Oriental Culture & Tourism, and by the end of the year, they launched a collaboration with Hui Tongxing to fully support the development of cultural tourism.

In terms of performance, the education-related business has steadily recovered. As of the first half of the 2024 fiscal year, by November 2023, the company had 843 learning centers, an increase of 135 compared to the previous year. Although it has shrunk by half compared to its peak, under the diversified education layout, the education-related business has recovered by over 80% compared to the 2021 fiscal year. The live streaming business has developed rapidly, with a revenue of $386 million in the first half of the 2024 fiscal year, contributing 19.5% of the total revenue.

Oriental Selection is the operational carrier for New Oriental EDU & Tech's live streaming sales, aiming to create top IP. In June 2022, the live streaming host Dong Yuhui ignited the live broadcast room with "bilingual live streaming," leading to knowledge-based sales occupying the top traffic on Douyin. The main products for live streaming sales are agricultural products, primarily self-operated products. At the end of last year, the cultural tourism business was launched. The company established a collaboration with Hui Tongxing through the super IP Dong Yuhui, attempting to drive sales of higher-priced cultural tourism products.

The company has multiple traffic matrix accounts on Douyin, including Oriental Selection, self-operated products, wine coming in, beautiful life, books, exploring the world, and Hui Tongxing. Among them, Oriental Selection has over 31 million followers as the main account, mainly selling food and beverages and fresh fruits. Hui Tongxing, established less than 3 months ago, has over 15 million followers, selling not only agricultural products but also cultural tourism products. It is worth noting that Oriental Selection's traffic account relies heavily on the super IP Dong Yuhui. De-Dongifying has become a major challenge for the management team, and Lao Sun has proven Dong Yuhui's value through actions. This has also led to the establishment of a joint venture with Huitong, as well as Yu Minhong's "strategic arrangements" in cultural and tourism products.

On one hand, New Oriental EDU & Tech is expanding its layout in live streaming sales while actively divesting its education business. The education business has been spun off to the parent company New Oriental EDU & Tech. In November last year, it announced the sale of the education business to the parent company and conducted internal restructuring of its business lines. To support the development of live streaming business, the parent company and Yu Minhong planned to increase their holdings by a total of HKD 700 million. However, the plan was announced to be halted on January 31 this year, mainly because Dongfang Zhenxuan is not short of funds. As of November 2023, Dongfang Zhenxuan has cash (cash and deposits) of 2.34 billion yuan.

Strong stock performance, still bullish in the medium to short term

Yu Minhong understands the capital market. Through the linkage between US and Hong Kong stocks, New Oriental EDU & Tech announced a $4 billion share repurchase plan in the US stock market. However, there is no repurchase or dividend data in the Hong Kong stock market. Due to the large number of institutional investors and high market attention, after the valuation entered the policy bottom, the US stocks drove the Hong Kong stocks all the way up. As of now, the company's market value in the US stock market is $14.883 billion (HKD 116.37 billion), while the market value in the Hong Kong stock market is HKD 115.6 billion, basically in sync.

However, the policy bottom is also the industry bottom. New Oriental EDU & Tech has broken the trend. Similarly, TAL Edu, as a leading company, has also done the same. TAL Edu's market value has increased more than 7.8 times from its low point, currently standing at $9.047 billion (HKD 70.73 billion). Unlike New Oriental EDU & Tech, TAL Edu is not digging into various businesses but focusing on the education field, with a slow recovery in performance due to the transformation of traditional businesses into quality education and the purchase of learning hardware. The recovery is less than 30%.

With the implementation of policies in the education and training industry, the negative impact on the sector has been exhausted, leading to more standardized industry development. After six years of reshuffling, supply shortages have emerged, and the leading companies may benefit the most. New Oriental EDU & Tech has a clear business structure, with the education business remaining in the parent company and non-education businesses such as live streaming sales and cultural tourism placed in Dongfang Zhenxuan. The education business has the potential for recovery and development, with performance having more room for imagination under the dual-drive model. The market has also given a valuation level higher than the industry average.

New Oriental EDU & Tech is on the rise, entering a technical bull market against the market trend. In contrast, Dongfang Zhenxuan, with its live streaming business, has seen its valuation halved. However, the investment logic mainly depends on whether the funds are strong. The trend of Dongfang Zhenxuan will not affect the trend line of New Oriental EDU & Tech. Previously, funds favored the live streaming business, and now they are optimistic about the prospects of education and training. The overall logic framework is based on the steady improvement of the fundamentals.

Moreover, with major investment banks in place, there have been a series of optimistic research reports released, providing target prices, but all with caution. The comprehensive target price is around HKD 73, not much different from the current price. Among them, First Shanghai has set a target price of HKD 83.7, 19% higher than the current price. The company's short-term bullish trend remains strong, with a high probability of further gains. In the medium to long term, performance will be key. The live streaming business's intellectual property is solid, continuously expanding into new products, and the future looks promising for the education and training business.