text | Dolphin Investment Research
$ New Oriental .us On July 31, Beijing time, the US stock market released the results for the fourth quarter of fiscal year 2024 before the market opened, corresponding to the operating conditions from February to May 2024.
First of all, market expectations for Q4 performance are not low (exceeding the upper limit of the company's guidance), and expectations for an increase in performance due to the summer heat in the next quarter are also high. At the same time, funds are still very concerned about New Oriental's profit margins. The last quarter's financial report significantly exceeded expectations when its revenue guidance was significantly exceeded, and the sharp drop caused by the pressure on guidance profit margins can already illustrate the problem.
But q4 New Oriental's revenue performance was only within expectations, and its guidance contained no surprises. Instead, profit margins fell again more than expected, with non-gaap operating profit margins of 3.2%, lower than market expectations and management guidance of 6%.
Break down the expenditure items:
1) The gross profit margin is slightly higher than expected. Although there is active promotion from Hui Peer (3p agency business charges commissions and is recognized as net income, the gross profit margin is relatively high), but in terms of revenue proportion Look, maintaining a stable gross profit margin in education is the real “difference”. The costs of the
education sector mainly include teacher salaries and rents, amortization and depreciation of property and equipment, and other costs. q4 has added 114 new learning centers and continues to accelerate its expansion. In this case, it can stabilize the gross profit margin, indicating that the demand for education has not diminished.
2) The US$20 million difference between the actual profit and the expected profit basically comes from the extra sales and administrative expenses. In the financial report, the company explained that it was brought about by the advancement of live broadcasting businesses such as Oriental Selection self-operated, followed by the expansion of in the learning center, which will inevitably lead to an increase in operating management personnel and an increase in salary incentives for group employees.
Although Mr. Dolphin is not optimistic about live broadcasting and ignores the live broadcast business when valuing the New Oriental division, we are not overly worried about the mismatch in the short-term production of education. But we have to admit that most funds currently care more about the company's profit performance. Therefore, it is difficult for the market to give positive feedback on Q4 performance. If the company does not express enough confidence in the performance outlook and profit recovery during the phone conference and subsequent small meetings, then it is not ruled out that New Oriental will still linger in the undervalued category for a period of time (if you want to refer to Dolphin For your specific valuation range, please check the relevant content in the latest review "Comments on Selling with Hui Peer").
But from a medium-term perspective, the demand for education will not slow down soon, especially quality education, which is still in the stage of rapid expansion of user penetration. According to our estimates, quality education revenue in the last quarter has been comparable to the second-highest period in 2019-2020, which can basically fill the gap in k9 subject training revenue. And based on this growth trend, there is not much problem in exceeding the peak level in 2021.
As for the increase in supply and the easing of the shortage of supply that some funds are worried about, Mr. Dolphin believes that there is no need to worry about it for the time being. Although there is indeed an acceleration in the issuance of quality education licenses, licenses are issued according to regions. The current monthly increase in the number of 1-2% nationwide is still difficult to support the current demand growth.
In addition, New Oriental’s brand mentality in the education industry also has a solid foundation and influence, and the barriers to competition are not low; the relevant departments have also set higher thresholds and standards for running schools. Many small and micro educational institutions are currently growing. It is not ruled out that the school will face policy risks due to non-standard school premises/courses.
In the period of profit pressure caused by mismatch in production, Dolphin recommends not to be too pessimistic; on the contrary, in the mature period when expansion slows down and profits are realized, it is time to be cautious.
(Note: New Oriental’s financial report only discloses part of the business performance, most of the operating conditions & guidance, and is disclosed in the results public conference call and the organization’s small-scale meeting, so the content of the later conference call is relatively important)
The following is a detailed review:
Educational needs The total revenue in the fourth quarter was 1.137 billion, which increased by 32% year-on-year in US dollars and 39% in RMB, exceeding the upper edge of the company's guidance, but market expectations are not low, so it is basically inline.The quarter-on-quarter decline in
growth rate is not due to weakening demand, but the impact of the base (the third quarter of last year corresponded to the peak of the last wave of the epidemic in early 2023, and the base was low. Subsequently, revenue in the fourth quarter of fiscal year 2023 has rebounded rapidly, and the base has increased.
segmented business Half of the situation will be announced in the conference call, and the other half will be announced in the small-scale meeting of the organization. For the latter, Dolphin will give the split estimate first, and will clarify the specific data in the message area for the same period last year, which is 3q23fy, corresponding to the natural year. From November 2022 to February 2023, it is the peak of the last wave of infections. Therefore, the base of q3 is low, and the year-on-year growth rate is of little significance compared with the previous quarter. Dolphin Monarch should be compared with q2
1) new business ( Quality education, learning machines) still maintain a high growth rate, Dolphin estimates it to be 40%+ (priced in US dollars).
Among them, the growth rate of non-disciplinary business is 50% (denominated in US dollars) and 57% in RMB. The growth was mainly driven by the number of registrations. There were 875,000 registrations in Q4, a year-on-year increase of 39%. Calculating backwards, tuition prices increased by 3.3% year-on-year. It is expected that unit price growth will accelerate during the summer peak season in the next quarter. In terms of other details of
's new business, the learning machine is relatively weak, and the camp program has just been launched, so it is still in a high growth rate range.
2) Among the old businesses, the growth rates of overseas study and adult businesses are slowing down at a high base, and reflects that post-epidemic dividends have begun to gradually decrease. But at the same time, exchange rate factors have also amplified the slowdown.
Specifically, the growth rate of study abroad business (consulting and test preparation) in US dollars is 17%~18%, and the year-on-year growth rate in RMB is 23%; the growth rate of adult English in US dollars is 16.4%, and the growth rate in RMB is 21%
3) k12 The growth rate of high school tutoring has not been disclosed, but it may be due to the impact of the off-season + high base that the growth rate has dropped significantly. However, the company's outlook for next year is not low, guiding 25% to 30% growth.
4) Live streaming income is due to the newly opened account with Hui Peer at the end of last year. From the perspective of gmv contribution, the increase in contribution is not low. Dolphin estimates that this part of the revenue increase will reach more than 500 million yuan in revenue, but with the divestment of Hui Peer, it is meaningless to discuss the current increase.
Regarding the revenue guidance for 1q25fy, the company’s guidance has changed this time. Perhaps in order to weaken the impact of short-term fluctuations caused by adjustments to the live broadcast business and highlight the growth of the education business itself, the guidance this time is to exclude self-operated merchandise income and live broadcast commission income from the group's revenue. Simply put, it focuses on educational performance.
In the next quarter, due to the peak summer season, the education business will definitely not be bad. For example, the company's phone call mentioned that the growth rate of quality education in RMB has reached 57%, and the entire new business also has a high growth rate of 45~50%.
We can also see from the financial indicator - deferred income (reflecting the demand for class registration in the next quarter) that there is no need to worry about the effects of this year's summer peak season.
Of course, market expectations are not low either. Overall, the company's guidance range is 1.255 to 1.284 billion US dollars, which corresponds to the market's consensus expectation of about 1.266 billion US dollars, which is neither surprising nor overjoyed. But with the summer vacation halfway through, and combined with actual education demand, the market was obviously expecting a better outlook.
During the conference call, the company's outlook for 2025 is not bad. Some of the growth guidance for each business in RMB are as follows:
(1) New business growth rate is 45%~50% year-on-year;
(2) Study abroad preparation is 20%~ 25%, study abroad consulting 15%;
(3) high school subject tutoring 25%~30%;
In fact, in addition to tracking the management’s guidance every quarter, Dolphin’s qualitative judgment on New Oriental is that after is adopted as a double reduction policy New Oriental, which has always expanded cautiously, has begun to accelerate its expansion. This shows that education veterans who have been immersed in the industry for many years have stronger confidence in both the industry and the company itself. This reflects that the current high demand can be expected to continue. .
Profit is lower than expected, where is the money spent?
q4 Profit margins fell again more than expected, with non-gaap operating profit margins of 3.2%, below market expectations and management guidance of 6%.However, Mr. Dolphin believes that there is a short-term production mismatch impact on , and the direction of stable improvement in profit margins from a medium- to long-term perspective should not change.
Break down the expenditure items:
1) The gross profit margin is slightly higher than expected. Although there is active promotion from Hui Peer (the 3p agency business charges commissions and is recognized as net income, the gross profit margin is relatively high), but in terms of revenue proportion Look, maintaining a stable gross profit margin in education is the real “difference”.
The costs of the education sector mainly include teacher salaries and rents, amortization and depreciation of property equipment and other costs. q4 has added 114 new learning centers and continues to accelerate its expansion. In this case, it can stabilize the gross profit margin, indicating that the demand for education has not diminished.
2) The US$20 million difference between the actual profit and the expected profit basically comes from the extra sales and administrative expenses. In the financial report, the company explained that it was brought about by the promotion of Dongfang Selection's self-operated, cultural and tourism and other live broadcast businesses, followed by the expansion of the learning center, which will inevitably lead to an increase in operating management personnel and an increase in salary incentives for group employees.
The business model is conducive to stable cash flow
Although profits were under pressure in the fourth quarter, the current cash flow situation was not bad. On the one hand, summer classes generally require payment in advance, so revenue recognition is inconsistent with cash inflow. On the other hand, in terms of investment, There may also be partial prefixes.
q4 Capital expenditures fell back to US$27 million, and the net operating cash inflow was 377 million, which was slightly lower than the 422 million last year. This was related to the increase in marketing expenses and personnel salaries spent in the current period.
's final free cash flow in 4q24 was only US$349 million. As of the end of May 2024, the company had net cash on its books of US$4.9 billion (cash + deposits + short-term investments), excluding US$1.78 billion in deferred income (mostly tuition fees, Subject to special supervision and cannot be used at will), the truly freely disposable cash is nearly 3.2 billion US dollars.
But of this cash, the company has not been able to use much of its cash to repurchase shares. As of July 39, before the release of the financial report, a small amount of repurchases were resumed during the fourth quarter, with a total of 1.3 million shares of the company repurchased, consuming nearly $100 million, and the average repurchase price was $77 per share. In this round of repurchase plans approved in 2022, the company has now repurchased a total of 7.3 million shares, spending $296 million.
