HAITONG INT'L: Maintaining the "outperform" rating for NEW ORIENTAL-S (09901) as the cost reduction and efficiency improvement strategy continues to show results.

HAITONG INT'L released a research report stating that it maintains a "outperform" rating on NEW ORIENTAL-S (09901), and values the company's 2026 fiscal year Non-Gaap NP at 18 times PE. Based on performance expectations, the target price has been raised from 49 HKD to 52 HKD. The bank observed that the company's cost reduction and efficiency improvement measures continue to be effective; meanwhile, through channel research, it was found that the company has made progress in optimizing teacher resources and enriching product diversity, including in areas such as OMO, 1V1, small class courses, and subject expansion. The bank believes that the steady growth of the company's K12 business is sustainable; although the study abroad business is under revenue pressure, the company is determined to improve the profit margin in this sector. Despite the company's revenue maintaining low double-digit growth rates, the bank suggests that investors pay more attention to the growth performance on the profit side, as the company's management has shown a strong commitment to creating returns for investors. HAITONG INT'L main points are as follows: 2QFY26 Performance Review The company's total revenue increased by 15% year-on-year to 1.191 billion US dollars, exceeding institutional consensus expectations by 3%, and surpassing the company's previous guidance range of 9% to 12%. NonGaap operating profit soared by 223% year-on-year to 89 million US dollars, exceeding consensus expectations by 62%, with a corresponding Non-Gaap operating profit margin of 7.5%, up 2.8 percentage points from the consensus expectation of 4.7%. Deferred revenue was 2.1615 billion US dollars, up 10.2% year-on-year, compared to a 10% year-on-year increase in 1QFY26. 3QFY26 K12 business revenue is expected to accelerate growth, mainly benefiting from improved retention rates and increased winter vacation course scheduling Over the past few quarters, the company has persisted in efforts to improve product strength and teaching quality, resulting in a significant increase in user retention rates for high school and K9 non-academic businesses. Considering that the Spring Festival this year is later, the winter vacation course scheduling is higher than last year. Based on this, the bank predicts that K12 business revenue will increase by 19% year-on-year to 815 million US dollars; with high school business growing by 18% year-on-year, mainly driven by 1V1 and OMO services, and K9 new business growing by 23% year-on-year, mainly benefiting from a strong recovery in junior high school. Study abroad business continues to be under pressure, dragging down overall revenue of the core education sector Against the backdrop of ongoing macroeconomic and international uncertainties, the entire study abroad industry is facing difficulties. With years of accumulated user mindshare and strong execution ability, the company continued to gain market share in the 2Q FY26 fiscal year, achieving a 1% year-on-year growth. The bank expects this trend to continue into the next quarter, but due to the seasonal characteristics of the study abroad consulting business, the bank holds a relatively conservative attitude towards the performance of the 4th quarter of the 2026 fiscal year. Looking ahead to next year, impacted by the industry's overall situation yet to recover, as well as the merger of the company's exam preparation and study abroad consulting businesses, the bank expects a decline in study abroad business revenue. Cost reduction and efficiency improvement strategies will continue to yield results in the following quarters The core education sector's operating profit margin increased by 3 percentage points in 2QFY26, mainly due to the effective implementation of cost reduction and efficiency improvement measures, including cautious expansion of learning centers and marketing expense control. The bank believes that these measures will continue to be effective, and expects a year-on-year increase in 3QFY26/FY26 Non-Gaap OPM of 1.4/1.6 percentage points to 13.4%/12.9%. Risk Warning Weakening macroeconomic conditions, intensified industry competition.