New Oriental Education & Technology Group (EDU US)
3QFY21:
New Oriental Education & Technology Group Recovery Remains Intact, Focus On OMO Initiatives Moving Forward; Regulatory Impact Expected To Be Limited EDU reported strong 3QFY21 results.
Revenue grew 29% yoy to US$1,190.5m, meeting our and consensus expectations. Operating margin declined 4.9ppt yoy to 9.7% as a result of a surge in marketing expenses in pursuing OMO initiatives.
Management guided for 4QFY21 revenue at US$1,101.9m-1,141.8m, representing 38-43% yoy growth, 3% above consensus estimate. Maintain BUY with a slightly lower target price of US$21.00 (HK$163.00).
RESULTS
• Solid results driven by better domestic recovery. New Oriental Education & Technology Group (EDU) reported revenue of Rmb1,190.5m in 3QFY21, increasing by 29% yoy, above management’s previously guided range. K-12 AST (after school tutoring) revenue grew 37% yoy, U-Can grew by 35% yoy, and Pop Kids registered 40% yoy growth.
Overseas consulting and study tour both saw recoveries with revenue coming in -12% yoy and +11% yoy respectively in 3QFY21, better than the -29% and +6% yoy recorded in 2QFY21. Total enrolment grew 43% yoy to 2.3m students. Non-GAAP operating margin declined by 4.9ppt yoy to 9.7% as a result of a 32% yoy surge in S&M expenses as EDU increased its onlinemerge-offline (OMO) initiatives to capture new market opportunities post COVID-19. NonGAAP net profit was US$163.2m, up 9.9% yoy and 35.5% above street estimates.
• Guidance and near-term outlook. Management guided 4QFY21 revenue to come in at US$1,101.9m-1,141.8m, representing a 38-43% yoy increase. K-12 AST revenue is expected to grow by 45-50% yoy, overseas test prep revenue is expected to increase 30% yoy and overseas consulting revenue is expected to be flat yoy. EDU’s overseas related business is showing signs of recovery (better than management expectation).
In the near term, EDU expects to be able to replicate its previous year’s success in the coming summer promotion campaign (hinting at achieving >60% retention rate). Management expects its non-GAAP operating margin for 4QFY21 to break even due to continued investment in OMO initiatives and a surge in teachers’ wages (EDU had increased teachers’ compensation twice during 9MFY21). KEY FINANCIALS
STOCK IMPACT
• Comments on recent regulatory development. EDU does not expect material impact on the group’s overall top-line growth given the temporary closure of Beijing learning centre (~11% of group revenue). Although EDU has acknowledged that revenue growth in Beijing is slowing (guided to decline 5% yoy in 4QFY21), the impact is likely to be mitigated by the migration towards online learning model.
EDU believes the company’s practice is aligned with the stringent regulatory measures and expects larger player to benefit from the further consolidation of market shares as smaller players may not have the financial capabilities to cope with the regulatory requirements.
• OMO and business outlook. EDU invested around US$59m in OMO teaching model during the quarter vs US$54m in 2QFY21 and had managed to penetrate 25 cities.
Management has reiterated the importance of OMO model in sustaining its future margin profile, as it will serve as a channel in acquiring students at a lower acquisition cost and achieve better user retention rate.
As the OMO model is still at its nascent stage, revenue contribution is expected to reach 10% by FY22 (vs 4-5% in FY21) with operating margin expected to be better than traditional offline class’ ~28%. Regarding its three key business strategies, EDU had guided for the following: a) to increase its learning centres by 20% in FY21; b) to introduce its OMO model in language and overseas test prep segments; and c) closely monitor its opex spending to improve overall operating efficiencies moving forward.
• Capacity expansion plan. The company added only 107 learning centres and schools this quarter, bringing its total number of learning centres to 1,625. On 9MFY21 basis, there was a net add of 160 centres, up 11% from 4QFY20. We are confident that the company will eventually achieve its expansion target of 20-25% new learning centres by the end of FY21. EARNINGS REVISION/RISK
• We raise our FY21/FY22 revenue by 2%/2%, on a stronger-than-expected domestic recovery, but cut our net profit forecasts by 20%/11%, factoring in heavier investment in OMO and increase in opex (which includes teachers’ compensation and rental). We expect non-GAAP operating margin to come in at 6.6% and 14% in FY21 and FY22 respectively.
• Risks include: a) prolonged COVID-19 pandemic and the US-China tension to impact its overseas business; and b) a second wave of COVID-19 outbreak. VALUATION/RECOMMENDATION
• Maintain BUY with a slightly lower target price of US$21.00 (HK$163.00), based on SOTP valuation. Our target price implies 44x FY22F PE and 1.0x PEG vs a 3-year EPS CAGR of 47%. The company is currently trading at 43x forward PE, 0.8SD above its 5-year average PE of 37x.
SHARE PRICE CATALYST
• Further market consolidation, easing of overseas travel restriction, and growth in lower-tier cities’ online penetration rates.
– By UOB Kay Hian Research