Several years after getting clobbered by a government crackdown, the private educator is regaining momentum on its newer education and training businesses

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Key Takeaways:

• New Oriental reported its operating profit more than tripled in the second quarter of its current fiscal year through last November
• The company's new education initiatives segment recorded 21.6% revenue growth during the period

To mark its 32nd anniversary last Nov. 16, New Oriental Education & Technology Group Inc. (NYSE:EDU) (9901.HK) founder Yu Minhong, while touring Antarctica, issued an internal letter to employees. In it, he used Antarctic penguins as a metaphor for teamwork, articulated New Oriental's aspiration to become a "sower of hope," and said that the company's East Buy (1797.HK) livestreaming e-commerce affiliate should serve as "a representative of corporate conscience."

But the morale-boosting letter failed to resonate. Instead, it drew criticism on social media, as commentators remarked its content failed to address practical pressures facing New Oriental's frontline staff. Sarcasm followed, including observations that "the boss is vacationing while employees are working overtime." The negative sentiment hit New Oriental's Hong Kong-listed shares, which closed down 2.17% on Nov. 18, marking a fourth decline over five trading sessions. Its U.S.-listed shares also sagged in the wave of negativity.

While such words and actions from top managers are often amplified and dissected by investors and observers, fundamentals ultimately dictate how publicly listed companies like New Oriental are valued. Some skepticism still exists towards the company, which is trying to show that education can still be profitable in China after a massive government crackdown banned most after-school tutoring services for K-12 students in 2021 and 2022. The company's latest quarterly results, released last week, show New Oriental may have reason for such confidence.

During the three months through last November, the second quarter of its fiscal year, New Oriental generated revenue of $1.19 billion, up 14.7% from a year earlier. Its operating profit for the period reached $66.3 million, up a hefty 244.4%, while its net profit rose 42.3% to $45.5 million. The big profit increases, significantly outpacing revenue growth, were particularly notable.

Profitability improvements

Despite a small decline in selling and marketing expenses to $194 million, New Oriental's total operating costs and expenses rose 10.4% year-on-year during the quarter, as administrative spending rose by 15.2% on a big jump in employee share-based compensation costs.

Still, the company's quarterly non-GAAP operating profit margin rose to 7.5%, up more than 4 percentage points from a year earlier. New Oriental CFO Yang Zhihui emphasized that the profit margin gains and accelerating revenue growth owed to improvements in the company's operational efficiency and better resource utilization for its core education business.

The company's new education initiatives recorded a notably strong 21.6% year-on-year revenue increase. Management said New Oriental has now launched its non-academic tutoring courses in about 60 cities, attracting about 1.06 million students during the quarter. Concurrently, its intelligent learning systems and devices have also been deployed in about 60 cities, with a base of about 352,000 active paying users.

The new education initiatives segment is distinguished from traditional K-12 academic tutoring that used to be New Oriental's bread-and-butter in its different cost structure. Investments needed for such new businesses involving content, teaching and research have greater replicability, resulting in lower costs per student. Simultaneously, the use of an online-offline model makes the use of classrooms, teachers and system resources more efficient, driving margin and profit growth.

Recovering demand for UK, Australian study

New Oriental's core businesses recorded more modest gains during the latest quarter. Its overseas test preparation revenue grew 4.1%, improving from just a 1% increase in the previous period. Its domestic test preparation business targeting adults and university students grew about 12.8% year-on-year. But its overseas study consulting service segment was a slacker, declining about 3% year-on-year, though the decline rate has shown signs of slowing.

Management highlighted that recovering demand for study in countries like Britain and Australia has, to a certain extent, provided a buffer against volatility in North America. More significantly, better integration of the company's study abroad consulting and test preparation businesses has helped to reduce internal duplicate costs, contributing to the company's improving profitability.

Management's outlook further reflected confidence that the recovery will continue. New Oriental raised its full fiscal year revenue guidance to between $5.3 billion and $5.5 billion, and forecast its third fiscal quarter revenue would rise between 11% and 14% year-on-year.

New Oriental's U.S.-listed shares rose 5.32% to $58.95 on the day it announced its results, while its Hong Kong-listed shares also gained 3%. Its U.S. shares have risen 13% since the company marked its 32nd anniversary, while its Hong Kong shares are up by 17.8%, providing a nice birthday lift for the stock. HSBC upgraded New Oriental from "hold" to "buy," expressing optimism that the new education and training businesses can sustain approximately 20% year-on-year growth in the coming quarters. The bank also raised its target price for the U.S.-listed shares from $58 to $68.

New Oriental's Hong Kong-listed stock currently trades at a forward price-to-earnings (P/E) ratio of about 25.7 times, significantly higher than the 7.7 for vocational educator China Education Group (0839.HK). The premium stems partly from strong visibility of New Oriental's profit recovery and improving cash flow, while it also is probably linked to Yu Minhong's personal stature. Continued strong growth for the new education and adult training segments could help to keep improving the company's overall margins, which could support the stock at its relatively high valuation. But if growth momentum slows in those areas, Yu Minhong may have to rush back from his recent globetrotting to help support his stock.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.