China’s New Oriental Education Makes Strong Recovery after Tutoring Ban
China’s leading private education company, New Oriental Education & Technology Group Inc. (EDU), has experienced a significant resurgence in its quarterly earnings, signaling a robust recovery from the government’s ban on after-school tutoring. The company swiftly adjusted its business model to adapt to the new regulations and has found success as an education provider in alternative ways, ultimately restoring its financial health.
New Oriental Education’s latest quarterly earnings exceeded market expectations, with revenues reaching an impressive 92% of their pre-ban level. The company reported a substantial increase in net revenues, rising by 47.7% to $1.1 billion during the quarter ending in August. Adjusted net profit also saw a significant surge, hitting a three-year high with a remarkable 126% jump to $189 million on a non-GAAP basis, better reflecting the operations of its main businesses.
This positive performance has been well-received by investors, leading to a surge in New Oriental’s share price. Shortly after the earnings report, the company’s U.S. share price rose by 5.5% to $64.59, reaching its highest level since July 2021. The recovery is particularly impressive considering the challenges the company faced when China’s government implemented policies to reduce the burden of homework and after-hours tutoring for students. The sudden change had a severe impact on the private education industry as a whole.
Prior to the policy changes, New Oriental generated $1.19 billion in revenue for the quarter ending in February 2021. However, the ban on its main revenue source led to immense costs associated with staff layoffs and the cancellation of rental contracts. Consequently, the company suffered substantial financial losses. Nevertheless, the latest quarterly revenue of $1.1 billion represents a remarkable recovery, with New Oriental’s turnover now at 92% of its pre-ban level.
New Oriental successfully navigated the aftermath of the ban by divesting its K-9 curriculum business and focusing on tutoring and exam-related services that were not impacted by the ruling. This strategic shift allowed the company to identify new revenue streams, such as extra-curricular education, intelligent learning systems, and e-commerce live streaming.
By the end of August 2021, New Oriental had expanded its reach, boasting a total of 793 schools and learning centers, an increase of 45 within three months and 87 more than the previous year. Furthermore, the company’s non-academic tutoring business was operational in nearly 60 cities, serving approximately 438,000 students during the last fiscal quarter. Additionally, New Oriental’s intelligent learning systems and devices had been adopted in around 60 cities, with approximately 181,000 active paying users, almost double the previous quarter’s numbers.
Looking ahead, New Oriental projects revenue for the current quarter ending in November to range between $785 million and $804 million, representing a year-on-year growth of 23% to 26%. Although lower compared to the previous quarter due to seasonal effects, the company anticipates a consistent increase in utilization rates, supporting revenue growth throughout the fiscal year.
The strong quarterly results have prompted major investment banks to raise their target price for New Oriental’s stock. CICC, in particular, highlighted the company’s exceeding revenue expectations and positive outlook for the full year. Anticipating a rise in the number of schools and teaching centers by 15% to 20% during the fiscal year, along with a steady increase in utilization rates, CICC raised the price target for New Oriental by 12% to $75, accompanied by an outperform rating.
Macquarie also acknowledged New Oriental’s conservative guidance for the second quarter ending in November, which forecasts a revenue growth range of 23% to 26%, primarily influenced by a higher base from the previous year. However, the bank noted the potential for another upside earnings surprise, citing the company’s tendency to provide conservative guidance and the continued strong growth momentum in its new business ventures. Macquarie maintained an outperform rating on New Oriental and increased its Hong Kong share target price to HK$63.6 from HK$53, an estimated rise of approximately 20% from the current levels.
Overall, New Oriental Education’s impressive recovery following the tutoring ban highlights its resilience and ability to adapt to changing circumstances. By diversifying its offerings and focusing on alternative revenue streams, the company has managed to surpass market expectations and regain its financial stability. With positive projections for the future, New Oriental appears poised for continued growth and success in the private education sector.
