On April 25th, New Oriental (9901.HK) saw its stock drop by over 18% in the morning after releasing its financial report the previous night. As of the time of the journalist's submission, New Oriental's stock price fell by 16.72%, and the stock price of Eastern Selection (1797.HK) fell by 7.95%.
Yesterday, New Oriental Group released its financial report for the third quarter of the fiscal year 2024. New Oriental (EDU.N) closed at $77.08 on the US stock market, a decrease of 13.96%.
The financial data of New Oriental as of February 29, 2024, shows that the group's net revenue for the quarter increased by 60.1% year-on-year to $1.207 billion; operating profit increased by 70.6% year-on-year to $113 million; net profit attributable to shareholders increased by 6.8% year-on-year to $87 million; adjusted net profit attributable to the parent company was $105 million, which is below the $120 million expected by institutions.
Additionally, the group's operating costs and expenses for the quarter were $1.094 billion, an increase of 59.1% year-on-year. The Non-GAAP operating costs and expenses (excluding stock-based compensation expenses) for the quarter were $1.066 billion, an increase of 60.1% year-on-year. The main reason for the increase was the rise in costs and expenses related to Eastern Selection's self-operated products and live e-commerce business.
Dolphin Investment Research analysis suggests that New Oriental's overall performance for the quarter was a mix of better and worse than expected. On one hand, there was high business growth, and on the other hand, it confirmed the points that the market was concerned about before the financial report—short-term profit weakening, which is also the reason for the group's stock price pressure in the recent month. Although the performance reflects the current anti-cyclical demand for education, market expectations are also high. At the same time, due to Eastern Selection's own business adjustments, including the opening of a new account "Walking with Hui," it has dragged down the group's overall gross margin level.
Regarding the education business, the financial report shows that as of February 29, 2024, the total number of schools and learning centers was 911, an increase of 68 compared to 843 as of November 30, 2023, and an increase of 199 compared to 712 as of February 28, 2023. As of February 29, 2024, the total number of schools was 81.
New Oriental's Executive Chairman of the Board, Yu Minhong, stated that the revenue for the third quarter increased by 60.1% year-on-year. The preparation for overseas examinations and overseas consulting business maintained a growth momentum, showing an increase of about 52.6% and 25.7% year-on-year, respectively. At the same time, the domestic examination preparation business for adults and college students recorded a year-on-year increase of about 53.2%. The revenue from new education businesses increased by 72.7% year-on-year. Among them, non-academic tutoring business was carried out in nearly 60 cities this quarter, with 355,000 registrations; intelligent learning systems and equipment were adopted in about 60 cities, with 188,000 active paying users this quarter.
Dolphin Investment Research analysis believes that in the education market where supply is less than demand, the pricing power is in the hands of the remaining leaders, and New Oriental's performance growth will depend more on the expansion pace chosen by the company at this stage. Over the past year, considering the group's profitability and regulatory environment, the management has been more prudent than aggressive in the pace of school expansion. The acceleration of the increase in the number of schools from a marginal change indicates that the company's confidence in the current and future education demand has increased.
Regarding Eastern Selection's live broadcast business, New Oriental's CEO, Zhou Chenggang, stated that the group continues to invest in the development of "Eastern Selection," strengthening the development of its self-operated products and expanding into different channels to attract a larger customer base with products and live broadcast content. While "Eastern Selection" continues to develop, it also implements comprehensive measures, including strengthening the supply chain system to better control food safety and product quality, expanding product categories and increasing SKUs, and striving to provide high-quality and value-for-money products.
Dolphin Investment Research believes that although Eastern Selection currently contributes to more than 20% of the group's revenue, due to its poor business model, low profitability, and future uncertainties such as the departure of star anchors and moral risks, competition substitution, and supply chain management, it tends not to overly expect the valuation of live broadcasting.Currently, Dongfang Selection is still in the investment phase. At the beginning of April, Dongfang Selection officially launched the "Hourly Reach" service and started broadcasting on the Douyin account "Dongfang Selection Hourly Reach." According to the reporter's understanding, the "Hourly Reach" service of Dongfang Selection first targets the Beijing market, having established cooperation with 17 front warehouses, covering 80% of the area within the Fifth Ring Road in Beijing. In the future, it will cover more cities.
Dongfang Selection has previously stated that by 2024, the company will collaborate with third-party logistics providers to pilot front warehouses in first-tier cities such as Beijing. The aim is to achieve faster and more cost-effective transportation by setting up front warehouses, completing the order-to-delivery process within two hours, and integrating actions such as order consolidation and packaging transportation to improve the user experience.
JiaoYin International estimates that New Oriental's revenue for the fourth quarter will increase by 38% to $1.18 billion, while the current management guidance is between 28% and 31%. The operating profit margin is expected to decrease by 3 percentage points year-on-year to 6%, mainly due to increased investment in Dongfang Selection and the off-season of the education business, as well as the impact of cultural tourism investment. After the release of this performance, the group's share price closed down nearly 14%, mainly affected by the short-term pressure on profit margins, with the current price corresponding to a price-to-earnings ratio of 20 times for the education business.