Shenwan Hongyuan Group Co., Ltd. has released a research report maintaining a "Buy" rating on NEW ORIENTAL-S (09901). The firm has raised its revenue forecasts for the company to $5.5 billion, $6.11 billion, and $6.89 billion for fiscal years 2026 to 2028, driven by robust growth momentum in its education business and the beginning of a recovery in its East Buy business. As the contraction in the overseas study business has bottomed out, the drag on profit margins is expected to be cleared soon. Concurrently, the company has slowed its annual growth rate of teaching centers to 10%, focusing on enhancing the capacity utilization of existing centers, which has led to the emergence of an inflection point in profitability. The bank has also increased its Non-GAAP net profit forecasts for FY26-FY28 by $570 million, $630 million, and $700 million, respectively, and raised its target price for New Oriental (EDU.US) to $72.4. Key viewpoints from Shenwan Hongyuan are as follows: In the second quarter of FY26, New Oriental reported revenue of $1.191 billion, a year-on-year increase of 14.7%. Revenue from its education business, which includes cultural tourism, reached $974 million, growing 13% year-on-year. Revenue from other businesses, primarily East Buy, was $217 million, marking a 22.9% year-on-year increase. Non-GAAP net profit attributable to the parent company was $73 million, surging 68.6% year-on-year. The Non-GAAP net profit margin stood at 6.1%, expanding by 2 percentage points compared to the same period last year. Growth in the overseas study preparation and consulting business reached $252 million in 2QFY26, a mere 1% increase year-on-year, which represents a significant slowdown of 29.3 percentage points from the high base of the previous year, but remained flat compared to 1QFY26. The company is integrating its overseas test preparation and consulting services and expanding its target customer base by increasing offerings for teenagers, aiming to enhance the resilience of its overseas business growth; the growth rate for this segment has bottomed out in 2QFY26. Revenue from new businesses, including K9 literacy tutoring and learning device operations, grew 21.6% year-on-year to $366 million in the second quarter, sustaining the high growth trend of non-academic literacy programs. Furthermore, the renewal rates for K9 literacy tutoring and learning device businesses continue to improve, indicating a further strengthening of product reputation. The number of teaching centers increased to 1,379 in the second quarter, up 21% year-on-year, though the growth rate slowed by 2.7 percentage points compared to 1QFY26. The company plans to boost operational efficiency and drive further margin expansion by improving the capacity utilization of its existing teaching centers. Although growth in the high-margin overseas study business has slowed, this was offset by improved profitability in the literacy business. The company is also advancing a series of measures, including staff streamlining and expense control; the Non-GAAP operating profit margin for 2QFY26 expanded by 4.7 percentage points year-on-year to 7.5%. The Non-GAAP operating profit margin is showing a trend of accelerated expansion, having expanded by 1 percentage point in the first quarter. Specifically, the Non-GAAP operating profit margin for the education business was 6.6%, expanding by 3.5 percentage points year-on-year. The Non-GAAP operating profit margin for other businesses, primarily East Buy, was 13%, representing a substantial expansion of 12.4 percentage points year-on-year. Potential risks include heightened regulatory policies on non-academic training and overseas geopolitical factors that could lead to visa obstructions for studying abroad, thereby slowing business recovery.
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