Shenwan Hongyuan Group: Upgrade NEW ORIENTAL-S(09901) to "Buy" with a target price of HK$54.9

Shenwan Hongyuan Group released a research report stating that it maintains an expected revenue of $5.38 billion, $5.98 billion, and $6.73 billion for the fiscal years FY26-FY28 for NEW ORIENTAL-S (09901). Due to the bottoming out of the overseas study business contraction, it is expected that the drag on profit margins will soon be cleared. Meanwhile, the company will slow down the growth rate of teaching locations to 10% for the entire year, and improve the utilization rate of teaching locations, gradually easing the pressure on profit margins. The bank maintains Non-GAAP net profits of $0.555 billion, $0.61 billion, and $0.679 billion for FY26-FY28, and raises the target price to $69.9 (corresponding to $54.9 Hong Kong dollars per share, with each ADR equivalent to 10 shares of common stock, Hong Kong trades in common stock), and upgrades it to a buy rating. Key points by Shenwan Hongyuan Group: The bank expects that New Oriental's revenue for 2QFY26 will be $1.165 billion, a year-on-year increase of 12.2%. The education business (including culture and tourism) achieved revenue of $0.957 billion, a year-on-year increase of 11%. Other businesses (mainly EAST BUY) achieved revenue of $0.208 billion, a year-on-year increase of 18%. The bank expects the Non-GAAP net profit attributable to the parent company to be $0.063 billion, a year-on-year increase of 77.8%. The Non-GAAP net profit margin is 5.4%, an increase of 2 percentage points year-on-year. Slowdown in the growth rate of the overseas study business: The bank expects that revenue from overseas exam training and consulting business in 2QFY26 will be $0.242 billion, a decrease of 3% year-on-year, slowing down by 33.3 percentage points compared to the same period last year (which had a high base). The high-end one-on-one overseas exam training business in the study abroad business is facing challenges due to its high-end consumer base. The company is adjusting the one-on-one class type to one-to-many, thus reducing the price per class hour, and expanding services to teenagers to enhance the resilience of the overseas business growth. The bank expects the growth rate of overseas study exam training and consulting business to bottom out in 2QFY26. Strong growth in new businesses: The bank expects revenue from new businesses (including K9 quality education and learning machine business) to increase by 21% to $0.364 billion in 2Q, with sustained high growth in non-subject quality education businesses. The company will provide quality courses at the primary school stage and introduce learning machine subscription services at the junior high school stage to meet the differentiated needs of primary quality training and secondary subject training, driving rapid growth of new businesses. The bank expects the teaching locations to increase to 1368 in 2Q, a 20% year-on-year increase, slowing down by 3.7 percentage points compared to 1QFY26. The company will enhance operational efficiency by exploring the utilization of existing teaching location capacities, driving further expansion of profit margins. Improvement in operating profit margins: Although the growth of the high-profit margin study abroad business is slowing down, it is offset by the improvement in profit margins from the quality education business. Meanwhile, the company continues to implement measures such as job simplification and cost control. The bank expects the Non-GAAP operating profit margin for 2QFY26 to expand by approximately 2 percentage points year-on-year to 4.7%. The Non-GAAP operating profit margin shows an accelerating expansion trend (1Q expanded by 1 percentage point), with a 4.1% non-GAAP operating profit margin for the education business, an increase of 0.9 percentage points year-on-year. The non-GAAP operating profit margin for other businesses (mainly EAST BUY) is 8%, an increase of 8.5 percentage points year-on-year. Risk factors: Increased regulation of non-subject training policies; Overseas geopolitical factors leading to a slowdown in the recovery of overseas study visas.