China K12 Educational Services_ Oct ’24 Pulse_ May-Oct Tutoring License Review_ K9 Non-Academic (+5,998) vs. High School Academic Balance

Summary of China K12 Educational Services Conference Call Industry Overview - The conference call focuses on the China K12 Educational Services sector, particularly the tutoring market for K9 non-academic and high school academic segments [2][12][19]. Key Points and Arguments Market Expansion - The K9 non-academic segment added 5,998 licenses from May to October, indicating a steady growth trend with a monthly addition of 200-500 licenses [2][5]. - The growth in May was particularly strong, with 2,643 licenses added, representing 44% of the total additions for the period [3][5]. Regulatory Environment - The market is evolving from regulatory compliance to demand validation, with the summer operations indicating genuine demand [5][6]. - The high school academic segment showed a slight decline in October, with a 0.13% month-over-month decrease in licenses, suggesting potential regulatory adjustments to balance demand and prevent excessive growth [8][9][10]. Operational Focus - The near-term focus for companies in this sector is on winter holiday positioning, while mid-term prospects suggest sustained expansion under a supportive policy framework [6][10]. - The emphasis has shifted from license acquisition to operational execution, highlighting the importance of established players who have capitalized on early transformation opportunities [6][10]. Valuation Insights - For New Oriental Education & Technology Group (EDU), a target price of US$83 is derived using a sum-of-the-parts (SOTP) valuation approach, reflecting the growth potential of the K9 segment and the challenges faced by the senior high school segment [20][22]. - The K9 segment is valued at a 20x FY25E non-GAAP EV/NOPAT multiple, while the senior high school segment is valued at 18x, indicating a recognition of its leadership position despite near-term headwinds [20][22]. Risks - Key risks identified include: 1. Tourism business integration leading to margin pressure during the initial ramp-up phase. 2. Consumption pattern shifts affecting premium offerings in high-end segments. 3. Growth moderation in overseas test prep and consulting businesses amid macro uncertainties. 4. Execution risks related to optimizing promotional strategies while maintaining revenue scale [20][24]. Additional Important Insights - The data indicates a nuanced policy approach towards high school academic AST licenses, with a potential equilibrium being sought by regulators [9][10]. - The overall landscape favors companies with operational excellence and market penetration as critical differentiators in a competitive environment [6][10]. This summary encapsulates the essential insights from the conference call, providing a comprehensive overview of the current state and future outlook of the China K12 Educational Services sector.