New Oriental Education_Quality compounder at a (deep) bargain; affirm OW

Summary of New Oriental Education Conference Call Company Overview - Company: New Oriental Education (EDU) - Industry: Education sector in China Key Points and Arguments 1. Stock Performance: EDU has seen a 30% correction over the past six months, underperforming compared to KWEB (+5%) and TAL (-14) despite strong core business momentum [1][2] 2. Revenue and Operating Profit Growth: Expected revenue and operating profit growth of approximately +30% and +40% respectively for FY25E, indicating the company's status as a "quality compounder" [1] 3. Valuation Opportunity: Current P/E ratio of 13x presents an attractive accumulation opportunity, with a potential upside of around 45% [2] 4. Guidance and Earnings: EDU has beaten revenue guidance for nine consecutive quarters, although the magnitude of beats has narrowed, leading to some investor disappointment [3] 5. Margin Concerns: Recent softness in margins attributed to one-off costs and transitory issues, including higher-than-expected bonuses and new center opening costs [3] 6. Record Profits: The company reported all-time-high profits of US$300 million in the latest quarter, with core education operating profit increasing by 47$50 million in break-up fees due to Dong's departure, but most of these costs are expected to be behind the company [13] Market Trends and Concerns 1. Population Decline Concerns: Investors are worried about the implications of a shrinking population in China on the tutoring sector; however, comparisons with South Korea suggest that demand for tutoring can still grow despite declining student numbers [20][21] 2. Regulatory Environment: The regulatory environment is expected to remain stable, with no significant policy changes anticipated that could negatively impact the tutoring industry [28][29] Technical Developments 1. Inclusion in Hang Seng Index: New Oriental Education will be added to the Hang Seng Index, expected to bring in approximately US$83 million in passive inflows, which is seen as a positive technical development [30] Financial Forecasts 1. **Revenue Projections**: Forecasts indicate revenue growth from US$4.314 billion in FY24 to US$6.075 billion in FY25, with a significant portion coming from the core education business [33] 2. Operating Profit Margins: Non-GAAP operating profit margins are projected to improve from 11% in FY24 to 15% in FY27 [33] This summary encapsulates the key insights from the conference call regarding New Oriental Education, highlighting its current performance, market position, and future outlook.