Shen Wan Hongyuan: Upgrading the New Oriental-S (09901) rating to a “buy” target price of HK$54.9

The Zhitong Finance App learned that Shen Wan Hongyuan released a research report stating that it will maintain the New Oriental-S (09901) FY26-FY28 revenue of 5.38 billion, 5.98 billion, and 6.73 billion US dollars. As the study abroad business shrinks to the bottom, the drag on profit margins is expected to clear up soon. At the same time, the company slowed the growth rate of teaching outlets to 10% throughout the year to increase the capacity utilization rate of teaching outlets, so the pressure on profit margins gradually cleared up. The bank maintained FY26-FY28 non-GAAP net profit of 555 million, 610 million, and 679 million US dollars, and maintained a target price of 69.9 US dollars (the target price corresponds to HK$54.9 per share; each ADR equals 10 common shares; Hong Kong stocks trade common shares) and raised it to a purchase rating.

Shen Wan Hongyuan's main views are as follows:

The bank expects New Oriental 2QFY26 revenue of US$1,165 million, an increase of 12.2% year over year. Among them, the education business (including cultural tourism) achieved revenue of US$957 million, an increase of 11% over the previous year. Revenue from other businesses (mainly Oriental Selection) was US$208 million, an increase of 18% over the previous year. The bank expects non-GAAP net profit attributable to the parent company to be US$63 million, an increase of 77.8% year over year. The non-GAAP net margin was 5.4%, an increase of 2 percentage points year over year.

The growth rate of the study abroad business bottomed out

The bank expects 2QFY26 overseas examination training and consulting business revenue to be US$242 million, down 3% year on year. The growth rate is 33.3 percentage points slower than the same period last year (high base for the same period last year) and 4 percentage points slower than 1QFY26. In the middle and high-end study abroad business, the 1-on-1 overseas examination business is being challenged due to its high-end consumption. The company reduced the unit price of lessons by adjusting the one-on-one class model to one-to-many; and expanded the number of service clients by increasing the youth overseas examination and training business, so as to enhance the resilience of overseas business growth. The bank expects the growth rate of the study abroad examination and consulting business to bottom out in 2QFY26.

New business growth remains strong

The bank expects revenue from new 2Q businesses (K9 literacy education+learning machine business, etc.) to increase 21% year-on-year to US$364 million, and the high growth in non-subject literacy businesses will continue. Through the product matrix, the company will provide literacy classes at the elementary school level and launch a learning machine subscription service at the middle school level to meet the differentiated needs of primary school quality training and middle school subject training, and drive the rapid growth of new businesses. The bank expects the number of 2Q teaching outlets to increase to 1,368, a year-on-year increase of 20%. The growth rate is 3.7 percentage points slower than 1QFY26. The company will explore the capacity utilization rate of existing teaching outlets, improve operational efficiency, and drive further expansion of profit margins.

Improvement in operating profit margins

Although the growth of the high-margin study abroad business has slowed, it has been offset by an increase in profit margins in the literacy business. At the same time, the company continues to promote a series of activities such as personnel reduction and cost control. The bank expects the 2qFY26non-GAAP operating margin to expand by about 2 percentage points to 4.7% year over year. The non-GAAP operating margin showed a trend of accelerated expansion (1Q expansion by 1 percentage point). Among them, the non-GAAP operating margin of the education business was 4.1%, an increase of 0.9 percentage points over the previous year. Other businesses (mainly Oriental Selection) had a non-GAAP operating profit margin of 8%, an increase of 8.5 percentage points over the previous year.

Risk warning: Non-subject training supervision policies have been strengthened; overseas geopolitical factors have blocked overseas study visas, and business recovery has slowed down.