Time To Buy New Oriental Education, Brean Says

• New Oriental Education & Tech Grp (ADR) EDU has seen an increase of 32.38 in its share price, reaching a high of $24.91 on October 20.
• Brean Capital’s Anne Shih has upgraded the rating on the company from Hold to Buy, with a price target of $32.
• The company has reported robust results for FY1Q16, while providing encouraging guidance for 2Q and indicating that margin recovery should begin in FY17.

Analyst Anne Shih mentioned that the company reported better than expected results for FY1Q16, “following previous consecutive quarters of solid execution in its K12 initiatives.”

According to the Brean Capital report, “We believe New Oriental’s strong brand and extensive network should help support the company in making sustained gains in market share in the K12 category.”

For FY1Q16, New Oriental reported a 16.4 percent year on year increase in revenue, ahead of the consensus and the high end of the guidance, driven by better than anticipated enrollment growth, especially in the K12 categories.

New Oriental “attributed its rapid growth in K12 to growing momentum following its renewed focus on K12, market share gains in a highly fragmented industry, and consistent and even countercyclical spending by Chinese households on education,” the report elaborated.

Management expects the rapid growth of K12 to continue over the next few years.

Non-GAAP EPS also beat the consensus, driven by increased revenue growth and improved classroom utilization rates. The non-GAAP operating margin was also ahead of expectations, although margins are expected to weaken during FY2016.

However, the company expects margins to recover, starting FY2017. “The future margin expansion should be driven by organic enrollment growth in K12, the moderation in network expansion and ensuing utilization gains, leverage in operational expenses, and the tapering of O2O investments in FY2017,” Shih said.