New Oriental's Current Growth Momentum Unlikely to Maintain

Equity Analyst

Cheng Wang

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After terminating its K-9 academic tutoring in 2021, New Oriental identified a few new business initiatives, such as nonacademic tutoring and intelligent learning systems and devices, etc. We are positive on these initiatives given New Oriental’s expertise in after-school tutoring and curriculum development. The new businesses accounted for only about 17% of revenue in fiscal 2023 but growth is robust. We project 30% revenue contribution by fiscal 2028.

The remaining businesses are primarily overseas test preparation, overseas study consulting, and high school academic tutoring. New Oriental has built a strong reputation in overseas-related business during the last three decades. We expect overseas-related business to grow at 13% CAGR through fiscal 2028. We estimate overseas-related business will still represent about 23% of revenue by fiscal 2028. We assume revenue from high school academic after-school tutoring will grow moderately at 8% CAGR, accounting for about 21% of revenue by fiscal 2028.

New Oriental’s online education subsidiary East Buy achieved big success in livestreaming e-commerce. The gross merchandise value of its Dong Fang Zhen Xuan account was among the highest in Douyin, the Chinese TikTok. Despite East Buy's leading position in livestreaming e-commerce, this business is becoming increasingly competitive. We project East Buy to grow at only 11% CAGR, contributing about 20% of revenue by fiscal 2028.

New Oriental’s legacy businesses are all profitable. The new initiatives also turned profitable in fiscal 2023. We forecast gross margin to expand by 2 percentage points to 55% in 2028 from 53% in 2023, helped by margin improvement in the new businesses. Coupled with positive operating leverage, we project net margin to rise to 10% in 2028 from 6% in 2023.

Business Strategy & Outlook

We do not think New Oriental has a moat.

New Oriental is a leading private education service provider in China. K-9 academic after-school tutoring accounted for 50%-60% of total revenue before it was terminated in 2021 after new industry regulations required that this business be nonprofit. New Oriental’s remaining established businesses mainly consist of overseas test preparation, overseas study consulting, and high school (grades 10-12) academic after-school tutoring. New Oriental is also exploring new business initiatives such as nonacademic tutoring and intelligent learning systems and devices. In addition, New Oriental is in livestreaming e-commerce business through its subsidiary East Buy. In fiscal 2023, we estimate overseas-related business accounted for about 24% revenue, high school tutoring about 28%, new businesses about 17%, and East Buy about 25%.

New Oriental started with overseas test preparations. It provides tutoring on various tests such as TOEFL and GRE to those who want to study overseas. New Oriental has built a strong reputation in overseas test preparation over the last three decades, but we are not fully convinced of a moat in this business. New Oriental does not own any test, it only provides tutoring. The entry barrier is low, and we do not see anything that cannot be replicated by competitors over time. We think teachers are the key assets for overseas test preparation, but experienced teachers often start their own business after gaining recognition from students. Overseas study consulting is a student placement business. The market is fragmented and the entry barrier is low. The services are undifferentiated, labor-intensive, and unscalable. We think it is unlikely that such a business will develop a moat. High school academic after-school tutoring carries very high policy risk. It is already regulated like K-9 academic after-school tutoring by some local governments.

The nonacademic tutoring market is highly fragmented. Demand is not as sticky as academic after-school tutoring. The lack of means to measure the effectiveness makes it difficult for tutoring providers to stand out from peers. Retention is often a problem when students are busy with academic coursework. Parents are not as willing to spend, and margins are lower compared with academic after-school tutoring. In addition, the government has been tightening regulations on nonacademic tutoring. We think it is difficult to develop a moat in this business.

The current competitive landscape for the intelligent learning systems and devices market looks better than after-school tutoring. According to Frost & Sullivan, the top-five smart learning device providers in China accounted for 48.5% of market share by retail sales value in 2021. The top-selling products include education tablets, education smart watches, translation tools, and so on. We think New Oriental has an edge over the traditional players given its extensive educational content. However, other after-school tutoring providers are also tapping this market. It is too early to predict whether New Oriental could develop a moat in this business.

New Oriental’s online education subsidiary East Buy has achieved big success in livestreaming e-commerce. Its Dong Fang Zhen Xuan account has attracted more than 20 million followers in Douyin, the Chinese TikTok. GMV was among the highest in Douyin. However, this segment is becoming increasingly competitive. We think it is unlikely that New Oriental can establish a moat in this business.

None

Economic Moat

New Oriental Education & Technology Group

New Oriental Education & Technology Group, Inc. is a holding company, which engages in the provision of private educational services. It operates through the following segments: Educational Services and Test Preparation Courses; Online Education and Other Services; Overseas Study Consulting Services; and Others. The company was founded by Min Hong Yu and Yong Qiang Qian on November 16, 1993 and is headquartered in Beijing, China.

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New Oriental Education & Technology Group, Inc. is a holding company, which engages in the provision of private educational services. It operates through the following segments: Educational Services and Test Preparation Courses; Online Education and Other Services; Overseas Study Consulting Services, and Others. The company was founded by Min Hong Yu and Yong Qiang Qian on November 16, 1993, and is headquartered in Beijing, China.

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