Shenwan Hongyuan Group: Maintaining a "buy" rating on NEW ORIENTAL-S (09901) with continued improvement in operating performance.

Shenwan Hongyuan Group released a research report stating that it maintains a "buy" rating for NEW ORIENTAL-S (09901). Due to the good momentum in the education business and the recovery of the EAST BUY business, the firm has raised the company's revenue forecast to $5.5 billion, $6.11 billion, and $6.89 billion for the FY26-FY28 fiscal years. As the shrinkage of overseas study business has bottomed out, the drag on profit margins is expected to be cleared. At the same time, the company will slow down the growth rate of teaching outlets to 10% for the year, improve the utilization rate of teaching outlet capacity, and the turning point in profit margins is already evident. The firm has raised the Non-GAAP net profit forecast for the FY26-FY28 fiscal years to $570 million, $630 million, and $700 million, and raised the target price for New Oriental Education & Technology Group, Inc. Sponsored ADR (EDU.US) to $72.4. Key points from Shenwan Hongyuan Group: Performance Summary New Oriental Education & Technology Group, Inc. Sponsored ADR reported revenue of $1.191 billion for 2QFY26, a year-on-year increase of 14.7%. The education business (including cultural tourism) achieved revenue of $0.974 billion, with a year-on-year growth of 13%. Other businesses (mainly EAST BUY) generated revenue of $0.217 billion, with a year-on-year growth of 22.9%. The company's attributable Non-GAAP net profit was $0.073 billion, a year-on-year increase of 68.6%. The Non-GAAP net profit margin was 6.1%, an expansion of 2 percentage points year-on-year. Bottoming out of overseas study business growth Revenue from overseas exam training and consulting business in 2QFY26 was $0.252 billion, a year-on-year increase of 1%, a slowdown of 29.3 percentage points compared to the same period last year (which had a high base), but consistent with 1QFY26. The company is integrating overseas exam training and consulting businesses, expanding the service target by increasing youth overseas exam training services to enhance the resilience of the overseas business growth. The growth of overseas study exam training and consulting business hit bottom in 2QFY26. Strong growth in new businesses Revenue from new businesses in 2Q (K9 skills training + learning machine business, etc.) increased by 21.6% year-on-year to $0.366 billion, with sustained high growth in non-subject literacy businesses. At the same time, the renewal rate of K9 skills training and learning machine business continued to increase, indicating a further enhancement of product reputation. The number of teaching outlets in 2Q increased to 1379, a year-on-year growth of 21%, with a slowdown of 2.7 percentage points compared to 1QFY26. The company will improve operating efficiency by tapping into existing teaching outlet capacity, driving further expansion of profit margins. Improvement in operating profit margins Although the high-margin overseas study business growth has slowed down, it has been offset by the profitability improvement in non-subject literacy businesses. Meanwhile, the company continues to carry out a series of measures such as personnel optimization and cost control. The Non-GAAP operating profit margin in 2QFY26 is expected to expand by 4.7 percentage points year-on-year to 7.5%. The Non-GAAP operating profit margin shows an accelerating expansion trend (1Q expanded by 1 percentage point). The Non-GAAP operating profit margin for the education business is 6.6%, a year-on-year expansion of 3.5 percentage points. The Non-GAAP operating profit margin for other businesses (mainly EAST BUY) is 13%, a year-on-year expansion of 12.4 percentage points. Risk Factors Additional regulations on non-subject training; Political factors affecting overseas study visa issuance by overseas GEO Group Inc may slow down business recovery.