New Oriental

New Oriental's fourth-quarter fiscal 2026 (ended May) revenue rose 23% year on year, while adjusted operating profit jumped 35%. The company guided for 14%-18% revenue growth in fiscal 2027.

Why it matters: Both fourth-quarter revenue and fiscal 2027 guidance exceeded our expectations. While overseas-related businesses remained soft, K-12 tutoring and East Buy, the company's livestreaming e-commerce subsidiary, continued to drive growth. K-12 tutoring revenue increased about 22% year over year, underpinned by learning center expansion and higher utilization rates. East Buy revenue also surged more than 50%, driven by strong demand for its private-label products and successful category expansion. The company's focus on teaching quality has improved student retention. Competition is also easing in China's K-12 tutoring market, as students increasingly prefer reputable providers with proven teaching quality over lower-cost alternatives offered by smaller operators.

The bottom line: We raise our fair value estimates by 10% to USD 65 (HKD 51) for no-moat New Oriental following 8%-15% increases to our earnings estimates for fiscal 2027-30. The shares appear fairly valued after rising 15% overnight.

Key stats: New Oriental expanded teaching capacity, measured by tuition center area, by 13% in fiscal 2026 and plans a further 10%-15% expansion in fiscal 2027. Current utilization stands at around 70%. The company expects K-12 tutoring revenue growth to outpace capacity expansion as utilization rates continue to improve, while maintaining a focus on profitability rather than scale.

Our discounted cash flow-based fair value estimate is USD 65 per share.

We expect overseas-related business to expand at only a 2% revenue compound annual growth rate through fiscal 2031 due to economic and geopolitical headwinds. We assume a 9% revenue CAGR for its tutoring and learning devices businesses as the company balances growth and profitability. We project a 13% revenue CAGR for the livestreaming e-commerce businesses. Overall, we forecast revenue to grow at a 9% CAGR over the next five years.

We forecast gross margin to remain stable through fiscal 2031. However, we project operating margin to rise to 12.5% in fiscal 2031 from 11.4% in fiscal 2026, driven by positive operating leverage.

We estimate a 6% return on new invested capital and a 3% annual growth in earnings before interest in our five-year stage-two period. Our weighted average cost of capital is 13%, the same as the cost of equity, as New Oriental has minimal debt.

We do not think New Oriental has a moat.

New Oriental started with overseas test preparations. It provides tutoring on various tests such as TOEFL and GRE to those who want to study overseas. New Oriental has built a strong reputation in overseas test preparation over the last three decades, but we are not fully convinced of a moat in this business. New Oriental does not own any tests; it only provides tutoring. The entry barrier is low, and we do not see anything that cannot be replicated by competitors over time. We think teachers are the key assets for overseas test preparation, but experienced teachers often start their own business after gaining recognition.

Overseas study consulting is a student placement business. The market is fragmented, and the entry barrier is low. The services are undifferentiated, labor-intensive, and unscalable. We think it is unlikely that such a business will develop a moat.

The after-school tutoring market is highly fragmented. Due to low entry barriers, any qualified tutor can set up shop with minimal capital, so competition is constant and localized. We think it is difficult to develop a moat in this business.

New Oriental’s subsidiary East Buy has achieved big success in livestreaming e-commerce. The gross merchandise value of its Dong Fang Zhen Xuan account is among the highest on Douyin, the Chinese TikTok. However, the livestreaming e-commerce business is extremely competitive. We think it is unlikely that New Oriental can establish a moat in this business.

Solid cost control will boost operating margin.

Revenue grows faster than expected, driven by higher student retention.

East Buy achieves stronger-than-expected growth through channel expansion.

Growth in New Oriental's K-12 education services could decelerate more sharply than anticipated as the student population peaks.

Challenges in overseas-related businesses last longer than expected, weighing on growth and margins.

Deeper-than-expected losses from the cultural and tourism business weigh on margins.