New Oriental: Just out of the "breakup pit" and hit by the "tariff hammer," can Supei sustain its foundation?

$New Oriental EDU & Tech(EDU.US) On April 23rd, Beijing time, [Company Name] released its performance for the third quarter of the fiscal year 2025, and this performance corresponded to the operational situation during the peak winter vacation season from December 2024 to February 2025.

This performance review still focuses on the education business, with the emphasis on management's guidance for future operations. In particular, under the geopolitical risks arising from tariffs, the growth prospects for the study abroad business have become more uncertain.

Specifically:

1. Poor Guidance, Partial Pricing

The most concerning aspect is the guidance, which is particularly disappointing. Compared to the company's adjusted expectations at the end of March, the Q3 performance basically met expectations, but the company's guidance for Q4 core education revenue is poor, with a significant gap from institutional expectations.

Although not broken down, Dolphin Research estimates that the impact is mainly due to the pressure on the study abroad business (the conference call revealed that the expected growth rate is expected to continue to decline to high single digits, with a conservative estimate of 5-10% for overseas exam preparation in fiscal year 2026 and zero growth for consulting). Institutions have high expectations for Q4, mainly because: on one hand, they consider the low base from last year, and on the other hand, they did not anticipate the unusually intense geopolitical confrontation triggered by tariffs.

Therefore, following the massive stock price fluctuations caused by tariffs in early April, market expectations have certainly undergone some adjustments and pricing. However, whether the pricing is appropriate is difficult to determine. What is clearer is that due to the ongoing fluctuations and uncertainties regarding tariffs, it is still early for both parties to conclude their game, but concerns brought about by geopolitical risks are hard to eliminate and will continue to suppress and weaken the demand for studying abroad.

2. Study Abroad Business Facing "Double Pressure"

Previously, due to economic downturns, especially affecting the middle class, the purchasing power for high-priced study abroad exam preparation services has declined, such as the demand for one-on-one services being downgraded to large classes.

However, with the local protectionist orientation of the Trump administration, the demand for studying abroad may have started to slow down significantly since the end of last year (corresponding to the Q2 and Q3 performance periods). Generally speaking, the demand for exam preparation services precedes that for study abroad consulting services, and the growth rate of Q3 exam preparation revenue has rapidly dropped to 7%, reflecting consumer concerns.

The tariff confrontation in April, which exceeded expectations, undoubtedly added to the difficulties for the study abroad business. Study abroad revenue accounts for one-fourth of the group's total revenue, significantly impacting valuation, thus creating disturbances in study abroad growth and making the group's growth prospects difficult to ascertain.

3. New Business High Growth Temporarily Unconcerned

The new business, mainly centered around non-academic subjects and learning machines, achieved a 35% growth. However, due to a high base from last year (the winter vacation came earlier), it showed a natural slowdown compared to the previous quarter.

In the short term, its prosperity is likely to be sustained. The non-academic enrollment in Q3 reached 408,000. Taking into account the differences in winter vacation timing across years, Dolphin Research averaged the growth rates over two consecutive quarters. The results showed that the performance in Q3 was similar to that in Q2, with the average growth rate stably remaining above 20%. It should be noted that the average transaction value, calculated by Dolphin Research, may not be entirely accurate. It is mainly used to observe trends. The period when price increases were easiest has passed. Accordingly, the growth rate declined from 18% in the previous quarter to 6%.

4. Growth pressure highlighted, adjustment of investment rhythm

Q3 operating profit was $125 million, with a profit margin of 10.5%. Excluding the operating profit margin contribution from Dongfang Zhenxuan, the operating profit margin was 12%, which was down from 14% in the same period last year, representing a year-on-year decline of 2 percentage points. This indicates that profitability has not yet recovered.

The profit pressure caused by mismatched production and investment, including losses from investments in new businesses such as cultural tourism, has persisted for several quarters. These factors are also core reasons for the valuation being suppressed over the past year. Generally, when profit pressure from mismatched production and investment coincides with increasing capacity utilization, it presents a good opportunity for growth investors to make their moves. However, in the current situation, the profitable study abroad business has declined first, extending the bottoming - out period before New Oriental's performance inflection point arrives.

Dolphin Research expects that, given the unclear outlook, management will slow down the original expansion pace (originally planned for a 20%-25% capacity expansion for the year), especially regarding the infrastructure and faculty team expansion related to the study abroad business. They may even make some cost - cutting and efficiency - enhancing adjustments to alleviate the group's profit pressure. In the conference call, management expects the Non - GAAP operating profit margin to grow year - on - year in the next quarter.

5. Shareholder returns expected to provide "bottom support" again

New Oriental has a considerable amount of cash on hand, and its business model of collecting tuition fees in advance means that its cash flow is generally not a concern. As of the end of February, the company's cash + short-term investments totaled $4.4 billion. After deducting the deferred revenue of $1.75 billion mainly from advance tuition fees, the net cash available for discretionary use is $2.68 billion.

As of yesterday, April 22, management has repurchased a total of 14.4 million ADRs, using $696 million in funds. It can be calculated that 3.2 million shares were repurchased this quarter at an average repurchase price of $49.

This repurchase plan, initiated in July 2022 and later increased to $700 million, is nearing its budget limit, but no new repurchase plan has been announced for this quarter, so attention should be paid to the conference call. During the performance pressure period, management's repurchase actions are also crucial for supporting the stock price.

Assuming that the current repurchase intensity can continue, the annualized repurchase scale based on the average from Q1 to Q3 is about $500-600 million. Compared to the current market value of $7.3 billion, the return rate would be 7.5%. If optimistically interpreted, if a special dividend of $100 million is issued this year, similar to last year, the total shareholder return would approach 8%.

Currently, New Oriental's shareholder returns are relatively high among Chinese concept assets. As long as management stabilizes this dividend rhythm, the value of the "dividend floor" will further stand out.

6. Overview of financial indicators

Dolphin Research's viewpoint: Although the new business is a key support point for New Oriental's rebirth since the double reduction policy, the study abroad business, which accounts for 25% of revenue and contributes 20% to profits, is also one of the core pillars of the main business.

Especially when the impact of the pandemic officially fades in the second half of 2023, the study abroad-related business is experiencing a wave of demand release, with its growth rate second only to new businesses such as non-academic education among New Oriental's main educational services. With a high proportion, high growth rate, and high profit margin, it can be said that in the past two years, the contribution of study abroad to New Oriental's valuation cannot be underestimated.

However, contrary to the management's guidance of "maintaining high demand" at the beginning of the 2025 fiscal year (i.e., the second half of 2024), the performance of the study abroad business quickly faced resistance. The most critical factor is macroeconomic— the collapse of the middle-class economy has reduced the demand for high-priced study abroad programs, and the mismatch between study abroad costs and employment returns has highlighted the cost-performance disadvantage. Secondly, the recovery of industry supply further compresses the potential for increasing customer unit prices.

During the Trump administration, concerns about great power confrontation escalated again. Especially under Trump's local protectionist policy, immigration, visas, and the tariff measures since April have further suppressed study abroad demand.

Looking at the visa situation in major study abroad countries, the number of visa approvals has declined by 10% year-on-year since the beginning of the year, with the absolute value even lower than at the beginning of 2023, highlighting the current trend of waning demand.

Therefore, even if the management provides quantitative guidance, Dolphin Research believes that there may still be a possibility of subsequent downward adjustments. In contrast, the capacity that was significantly expanded in the past two years, especially the teaching team for the study abroad business line, is expected to continue to suppress short-term profit performance. Thus, Dolphin Research boldly speculates that the company may also make some adjustments (slowing down capacity expansion and targeted cost reduction and efficiency improvement) to relieve pressure. During the conference call, the company clearly mentioned implementing cost control, with guidance expecting a year-on-year increase in profit margins in Q4.

As for the new business, Dolphin Research continues to lean towards a positive outlook in the short term, while in the medium to long term, it needs to gradually pay attention to the impact of declining birth rates (which have been falling since 2018 in China).

Finally, regarding valuation, expectations from leading investment banks have been adjusted downward, especially since the tariff confrontations in April, with the decline accompanied by further adjustments in market expectations. Therefore, the poor guidance should have already incorporated some expectations. However, whether the pricing is accurate is difficult to determine.

Based on previous market expectations for the 2025 fiscal year performance, a cautious downward adjustment of 5% (institutional expectations for 2025 operating profit of 430-480 million, we adjust it to 450 million) results in a current market value of 7.3 billion USD, corresponding to a P/NOPAT (post-tax operating profit, 20% tax rate) of around 20x, which has already discounted some growth premium. However, the uncertainty of profit growth for the 2026 fiscal year is high, with a conservative estimate of 10% growth, leading to a long-term valuation of 18x, which is not significantly low. Additionally, there are potential systemic risks, so it cannot be considered absolutely safe.

However, if we exclude the current losses from cultural tourism and the unstable factors of live streaming, and conduct a segment valuation solely for the education sub-business, Dolphin Research believes that a neutral valuation of 9.3 billion USD can actually be seen (approximately P/NOPAT=25x), which still has a 25% upside compared to the current valuation.

If we are strict and exclude the net cash (e.g., deferred revenue from prepaid tuition) of 2.9 billion, the valuation of the education business is 6.4 billion, which means the current market value of 7.3 billion should be discounted by 10%. However, considering the potential shareholder return of 7.5-8%, the restored valuation is actually quite similar.

Therefore, in summary, currently, New Oriental is in a position where the downside is limited, and the theoretical space for a rebound is considerable, but there are slight obstacles in the short term (catalysts for turning points, insufficient growth certainty). Given the relatively high systemic risk brought by tariffs, the more prudent gaming returns still lie in the more substantial gains brought about by panic adjustments during subsequent geopolitical risk escalations. Especially if New Oriental maintains its current repurchase intensity during the performance pressure period, it will attract some value funds' attention during panic.

(Note: New Oriental's financial report only discloses part of the business performance, while most operational conditions & guidance are disclosed in the performance conference call and small-scale institutional meetings, so the content of the upcoming conference call is relatively important. Dolphin Research will update in the comments section later.)

The following is a detailed commentary

1. Study abroad demand faces "double pressure"

In the third quarter of fiscal year 2025, New Oriental's total revenue reached 1.183 billion USD, representing a 2% year-on-year decrease. Excluding the live streaming business, the core education revenue was 1.038 billion USD, slightly above the upper end of the company's guidance range.

The company's revenue guidance for Q3 core learning business is in the range of 1.009 to 1.037 billion USD, implying a growth rate of 10% to 13%, which is lower than the 25% growth expectation of leading institutions. The high expectations from institutions are partly due to the low base last year and partly because of the unexpectedly intense tariff confrontation at the end of last month.

The situation of the segmented business is partly disclosed in the conference call and partly in small-scale institutional meetings. Dolphin Research currently provides split estimated values and will clarify specific data in the comments section later:

1）Study abroad training and consulting grew by 7% and 21%, respectively. Generally speaking, the demand for exam training precedes study abroad consulting services. The growth rate of exam training revenue in Q3 has already dropped to 7%, indicating that study abroad demand has continued to slow down since the beginning of the year.

In the chart below, the number of study abroad visas issued has decreased by 10% year-on-year since the beginning of the year, and this decrease does not yet reflect the impact of the tariff trade war, mainly due to weakening of domestic self-demand due to macroeconomic factors.

The company’s guidance for Q3 overseas business growth is in the high single digits, with the growth expected to be around 6-8%.

2) Adult English grew by 17%, but still faces significant declines under a high base. However, short-term demand remains relatively stable, and the company expects growth to continue at around 17% in the next quarter.

3）The year-on-year growth rate of new business in the third quarter naturally slowed to 35%, in line with guidance and expectations. The company still expects growth of over 30% in Q4.

In the third quarter, the number of enrollments in non-academic education was 408,000. Considering the differences in winter vacation timing across years, Dolphin Research will look at the average growth rate over two consecutive quarters. Q3 is similar to Q2, with an average growth rate stabilizing at over 20%.

The average transaction value is a calculated value by Dolphin Research and may not be accurate, mainly used to observe trends. The period of easiest price increases has passed, and the growth rate has decreased from 18% in the previous quarter to 6%.

The number of subscriptions for learning machines is 309,000, a significant net increase from 260,000 in the previous quarter. The competition in the learning machine industry is fierce, with peers engaged in price wars. Overall shipment volume is rising, but the average transaction value continues to decline.

2. Extended mismatch period in production and investment, or adjustment of capacity expansion pace

The arms race for capacity expansion has continued for a year, and the profitability of leading companies has weakened. However, in addition to climbing capacity utilization, New Oriental also faces pressure from study abroad growth and losses from investments in elderly cultural tourism (mainly reflected in marketing expenses).

Dolphin Research expects that, given the unclear growth outlook, management may slow down the previously planned pace of capacity expansion (20%-25% annual capacity expansion), especially for infrastructure and faculty team expansion related to study abroad business. They may even make some cost reduction and efficiency improvement adjustments to alleviate the group's profit pressure.

3. Focus on the "dividend floor" of valuation

In the third quarter, operating net inflow was less than $1 million, a significant year-on-year decline, mainly due to the impact of the study abroad business on tuition revenue, with short-term deferred income decreasing more than usual. At the same time, the increase in team and operational expenses due to capacity expansion has dragged down profits, thereby affecting cash flow overall. Capital expenditure in the third quarter was $54 million, resulting in negative free cash flow for 3Q25.

As of the end of February 2025, the company had $4.4 billion in net cash on its books (cash + deposits + short-term investments), excluding deferred income of $1.75 billion (mostly tuition, subject to special regulation and cannot be freely used), leaving nearly $2.7 billion in truly discretionary cash.

As of yesterday, April 22, management had repurchased a total of 14.4 million ADRs, spending $696 million. Calculations show that 3.2 million shares were repurchased this quarter at an average repurchase price of $49.

This was part of a $700 million repurchase plan initiated in July 2022. The plan has since been increased, and the budget is now about to be exhausted. However, no new repurchase plan has been announced this quarter, so it is recommended to pay attention to the conference call. During this performance pressure period, management's repurchase actions are also crucial for supporting the stock price.

Assuming that the current repurchase intensity can continue, the annualized repurchase scale based on the average from Q1 to Q3 would be about $500-600 million. Compared to the current market value of $7.3 billion, the return rate would be 7.5%. If we optimistically interpret this, a special dividend of $100 million is issued this year, similar to last year, the total shareholder return would be close to 8%.

At present, New Oriental's shareholder returns are relatively high among Chinese concept assets. If management stabilizes this dividend rhythm, the value of the "dividend floor" valuation will be further highlighted. After the delisting risk is eliminated, it may attract some value funds' attention.