Investment Rating - The report maintains a "BUY" rating on New Oriental, indicating a strong core educational business, solid margin expansion trend, and attractive shareholder return [1][18]. Core Insights - New Oriental's 2QFY26 results exceeded expectations, with net revenue increasing by 15% YoY to US$1.19 billion, surpassing Bloomberg consensus estimates by 3% [1]. - Non-GAAP operating income surged by 207% YoY to US$89.13 million, significantly beating the consensus estimate of US$54.87 million, driven by enhanced operational efficiency [1]. - The management anticipates net revenue growth of 11-14% YoY for 3QFY26E, raising the FY26E net revenue forecast to US$5.29-5.49 billion, reflecting solid momentum in new educational and high-school tutoring businesses [1]. Financial Performance - Revenue projections for FY26E are set at US$5.47 billion, with a YoY growth of 11.6%, and adjusted net profit is expected to reach US$594.2 million [2]. - The report forecasts a continued revenue growth trajectory, with FY27E and FY28E revenues projected at US$5.99 billion and US$6.46 billion, respectively [2]. - Non-GAAP operating profit margin (OPM) is expected to expand to 12.8% in 3QFY26E, up from 7.5% in 2QFY26, indicating improved operational efficiency [9][10]. Valuation - The target price for New Oriental is set at US$78.00, reflecting a 32.3% upside from the current price of US$58.95 [3]. - The valuation is derived from a sum-of-the-parts (SOTP) analysis, with the educational and consulting business valued at US$75.00 based on a 25x FY26E PE ratio [12][13]. - The report highlights a strong growth outlook for the educational segment, with a revenue CAGR of 10% expected from FY26 to FY28 [13].

Company Overview - New Oriental Education & Technology Group is a leading provider of private education services in China, operating a vast network of schools and learning centers, offering a diversified portfolio including language training, test preparation, and online education [5][8] - As of the latest report, the company's market capitalization is $9.3 billion, with a revenue of $5 billion and a net income of $367 million for the trailing twelve months [4] Recent Developments - Serenity Capital Management increased its stake in New Oriental Education & Technology Group by approximately $21.6 million, acquiring 411,380 additional shares during the third quarter, bringing its total holdings to 656,878 shares valued at $34.9 million as of September 30 [2][3] - The fund's investment now represents 8.8% of its reportable assets under management, making New Oriental its fifth-largest holding [3][7] Financial Performance - The company's first-quarter fiscal 2026 revenue rose 6.1% year over year to $1.52 billion, while operating income increased by 6% to $311 million, with a non-GAAP operating margin improvement to 22% [10] - The company ended the quarter with over $1.2 billion in cash and plans to return at least 50% of annual net income to shareholders through dividends and buybacks starting this fiscal year [11] Market Position and Strategy - Following regulatory changes in China's education sector, New Oriental has shifted its focus towards adult education, overseas test preparation, and consulting services, adapting its business model to ensure sustainability and profitability [9][10] - The company is positioned as a scaled, profitable survivor in a challenging market, indicating potential for future growth from a more stable base [12]

Financial Data and Key Metrics Changes - Total net revenue increased by 6.1% year over year, reaching $1,412.6 million [4] - Non-GAAP operating margin improved to 22%, a year-over-year increase of 100 basis points [4] - Operating income rose by 6% year over year to $310.8 million [11] - Net income attributable to New Oriental decreased by 1.9% year over year to $240.7 million [12] - Non-GAAP net income decreased by 1.6% year over year to $258.3 million [12] - Deferred revenue increased by 10% year over year to $1,906.7 million [14] Business Line Data and Key Metrics Changes - Overseas test prep business revenue increased by about 1% year over year [5] - Overseas study consulting business revenue increased by about 2% year over year [5] - Adults and university students business revenue increased by 14% year over year [5] - New educational business initiatives recorded a revenue increase of about 15% year over year [7] Market Data and Key Metrics Changes - Non-academic tutoring business expanded to around 60 cities, with top 10 cities contributing over 60% of revenue [6] - Intelligent learning system and device business tested in around 60 cities, with top 10 cities contributing over 50% of revenue [7] - Integrated tourism-related business connected across 55 cities, with top 10 cities contributing over 50% of revenue [7] Company Strategy and Development Direction - The company is focused on enhancing operational resilience and sustainable profitability [4] - Plans to increase presence in cities with stronger performance while managing resources carefully [15] - Continued investments in AI and OMO (online merging offline) systems to improve educational services [8][9] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about improving margins and operational efficiency while maintaining cost control [15] - Guidance for total net revenue in Q2 2026 is projected to be between $1,132.1 million and $1,263.3 million, representing a year-over-year increase of 9% to 12% [16] - Full fiscal year 2026 revenue guidance remains between $5,145.3 million and $5,390.3 million, indicating a year-over-year increase of 5% to 10% [16] Other Important Information - The company announced a cash dividend of $0.12 per common share and a share repurchase program of up to $300 million [17][18] - The effective tax rate for Q1 was higher due to special circumstances, expected to normalize in future quarters [54] Q&A Session Summary Question: Competition landscape in K-12 business - Management noted increased competition during summer but highlighted improved student retention and enrollment in autumn classes [22][23] Question: Share-based compensation increase - The increase in share-based compensation was attributed to grants issued in the previous fiscal year, expected to remain at similar levels in upcoming quarters [28][29] Question: Overseas business growth breakdown - Management indicated that younger age groups in overseas test prep grew over 25% year over year, while consulting business saw strong growth in non-U.S. and U.K. markets [34][35] Question: Operating margin outlook - Management expects continued margin expansion driven by cost control and operational efficiency, with optimism for Q2 [49][50] Question: Tax rate expectations - The effective tax rate was higher in Q1 due to special circumstances, with expectations for it to normalize in future quarters [54]

Financial Data and Key Metrics Changes - Total net revenue increased by 6.1% year over year, reaching $1,412.2 million [4][11] - Non-GAAP operating margin improved to 22%, a year-over-year increase of 100 basis points [4] - Operating income rose by 6% year over year to $310.8 million [11] - Net income attributable to New Oriental decreased by 1.9% year over year to $240.7 million [12] - Deferred revenue increased by 10% year over year to $1,906.7 million [13] Business Line Data and Key Metrics Changes - Overseas test prep business revenue increased by about 1% year over year [5] - Overseas study consulting business revenue increased by about 2% year over year [5] - Adults and university students business revenue increased by 14% year over year [5] - New educational business initiatives recorded a revenue increase of about 15% year over year [6] Market Data and Key Metrics Changes - The top 10 cities contributed over 60% of the non-academic tutoring business revenue [5] - The top 10 cities contributed over 50% of the intelligent learning system and device business revenue [6] - Integrated tourism-related business connected across 55 cities, with the top 10 cities contributing over 50% of revenue [6] Company Strategy and Development Direction - The company is focused on enhancing operational resilience and sustainable profitability [4] - Continued investments in new education business initiatives aim to facilitate students' all-around development [5] - The company is leveraging AI to streamline internal operations and improve teaching efficiency [8][9] - A strategic approach to capacity expansion and hiring is being implemented to ensure quality offerings [15] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about improving margins and operational efficiency while maintaining cost control [15] - Guidance for total net revenue in Q2 FY 2026 is projected to be between $1,132.1 million and $1,263.3 million, representing a year-over-year increase of 9% to 12% [16] - For the full fiscal year 2026, total net revenue is expected to be between $5,145.3 million and $5,390.3 million, indicating a year-over-year increase of 5% to 10% [16] Other Important Information - A shareholder return plan has been initiated, including a cash dividend of $0.12 per common share and a share repurchase program of up to $300 million [17][18] - The effective tax rate for Q1 was higher due to special circumstances, expected to normalize in future quarters [46] Q&A Session Summary Question: Competition in K-12 Business - Management noted that K-12 business revenue growth is expected to accelerate, with K-9 new business projected to grow around 20% year-over-year in Q2 [21][24] Question: Share-Based Compensation Increase - The increase in share-based compensation was attributed to grants issued in the previous fiscal year, with expectations for similar levels in upcoming quarters [26][27] Question: Overseas Business Performance - Overseas test prep for younger age groups grew over 25% year over year, while consulting business in Asia showed strong growth [29][32] Question: Shareholder Return Policy - The shareholder return policy is based on net profit and cash flow expectations, with a commitment to maintain a high payout ratio [35][37] Question: Operating Margin Outlook - Management expects margin expansion to continue, driven by cost control and operational efficiency [41][44] Question: Tax Rate Expectations - The effective tax rate in Q1 was higher due to special circumstances, with expectations for it to normalize in future quarters [46]