Deutsche Bank maintains new Oriental rating target of 23.5 USD

July 23 Morning, Beijing time, Deutsche Bank published a study today, the New Oriental (nyse:edu) 's stock rating to maintain the "holding" (Hold) unchanged, while its target price cut by 13%, from 27 U.S. dollars to 23.5 U.S. dollars.

The following is a summary of the contents of the report:

The reorganization of English business of bubble children and the reform of English examination policy brought against the wind

-One-off business disposition income and tax rate drop make profit exceed expectation:

New Oriental's revenue for the 2014 quarter, at 287.5 million U.S. dollars (up 20% per cent), was at the top of the company's management expectations range of 3% and 8% per cent higher than that expected by Deutsche Bank analysts and Wall Street analysts, mainly because of overseas test preparation and consultancy operations ( The average selling price of a one-time-excellent promotional campaign to boost its revenue growth of 29% per cent year-on-year and its ability to operate (19% per cent year-on-year) increased.

New Oriental's gross margin of 50.4% in the quarter, in line with Deutsche Bank analysts ' expectations, is 1.5% higher than Wall Street analysts ' average. As a result of rising operating expenses, the operating profit margin of the new Oriental in the quarter was 9.4%, 3.3 and 2.9% lower than the average forecast by Deutsche Bank analysts and Wall Street analysts.

But new Oriental's earnings per share of US depository receipts (not in accordance with US general accounting standards) of $0.30 were 16% and 6% higher than the average forecast by Deutsche Bank analysts and Wall Street analysts, mainly because of a one-off gain (3.6 million dollars) in the redistribution of Meigsen losses, and its effective tax rate has fallen. Excluding these special projects, new Oriental's earnings per share of U.S. depository receipts (not in accordance with U.S. General Accounting standards) were 8% higher than Deutsche Bank analysts expected in the quarter, but were 4% lower than average Wall Street analyst expectations.

-The crucial summer season's fiscal quarter revenue outlook is far less than expected and is likely to lead to deleveraging:

New Oriental management estimates that revenue for the first quarter of fiscal year 2015 grew 6% to 10% year-on-year, with a value of 12% and 10% per cent lower than those expected by Deutsche Bank analysts and Wall Street analysts. Management attributed this weak performance forecast to the following four factors:

(1) The impact of the recent changes in Beijing's English test policy, the English summer camp and the "boarders" business enrollment in the number of students decreased;

2 Bubble Children's English business restructuring, the business to the second quarter of the 2015 fiscal year to start recovery. Historically, the first quarter, the most important quarterly for the new Oriental, contributed 35% to the fiscal year's revenue and 60% to 70% profit. But corporate management expects a seasonal shift from summer to winter to have a minimal impact on performance in the next few quarters, as its business portfolio shifts to primary and secondary education.

We expect the profitability of the new Oriental to continue to be under pressure, the reason: 1 The weak performance of the most important summer's fiscal season will leverage its business; 2 English summer camps and "boarders" are the most profitable business units; 3 positive marketing measures; 4 to make significant investments in online and technical areas ( such as the introduction of Le CI application and okay platform, and the United States assessment software Systems Limited to achieve online training cooperation, as well as mobile English learning products and Tencent (0700.HK) to achieve strategic cooperation, etc.).

-The growth of student enrolment is sluggish and the pace of expansion of learning centres may slow:

New Oriental total student enrollment in the quarter of 581,400 (up 4%), the main growth driver is gifted (up 32%), the business launched a 10% discount promotional activities. At the same time, student enrolment in other business sectors has generally declined, especially in the recent reorganization of the Bubble Children's English (down 5% per cent), once the growth business unit. The number of students enrolled in overseas test preparation, domestic test preparation and adult English was down 3%, 11% and 2% respectively.

New Oriental is currently expected to launch new bubble courses in the second quarter of fiscal year 2015 and beyond. For fiscal year 2015, the company's goal was to open 40 to 50 new learning centers, slightly less than the previous 60 to 70.

-Lowered to target price 13% to 23. 5 USD; maintain "hold" rating; Risk:

In view of the weak revenue outlook of the new Oriental and the prospect of a possible decline in profit margins, we will reduce revenue forecasts for the first quarter of fiscal year 2015, 2015 and 2016, respectively, by 10%, 3% and 4%, with the first quarter of the fiscal year 2015, Earnings per share of US depository receipts in fiscal year 2015 and fiscal year 2016 (not in accordance with U.S. General accounting standards) are expected to be cut by 25%, 8% and 4% respectively. Our new Oriental equity target of $23.5, which is set at 1 times times the target peg (the market growth rate) and the 2014 to 2016 annual earnings growth rate of 15.5%, is based on the assumption that 18%. We keep the new Oriental stock rating unchanged.

Main risks: The uncertainty of the online English course for bubble children, the intensifying competition situation and the regulatory reform which is unfavorable to the new Oriental. (Tangfeng)