JPMorgan keeps new Oriental rating at $34

Beijing time July 23 afternoon news, JPMorgan released a study today, to maintain the new Oriental (nyse:edu) Stock "overweight" (overweight) rating, and its target share price from 40 U.S. dollars to 34 U.S. dollars.

The following is a summary of the report:

New Oriental's fiscal year 2014 was better than expected, with revenue and adjusted net profit higher than expected by 3% and 10% respectively. The share price fell after the announcement, with the fall in summer English classes, which led to a June drop in revenue. We still maintain the "overweight" rating of the unit, but cut the target share price from $40 trillion to $34.

Despite the setback in the first quarter, growth strategies have not been affected. New Oriental plans to add 40 learning centers in fiscal year 2014, hoping to raise revenue at a manageable pace and achieve healthy profit margins. In the new Oriental 2015, the investment in research and development of online business also increased by 60% in fiscal year 2014. Despite problems with English-related admissions, we still expect the number of admissions, tuition fees and operating leverage for the 2015 and 2016 kindergartens to primary and international prep courses to increase.

Lower earnings forecasts and cut target share prices to $34: We cut the net profit forecast for fiscal year 2015 and 2016 by 6% and 8% respectively to reflect the expected decrease in the number of English courses in the fiscal year 2015. Our target share price for cash flow discounted (DCF) was reduced from $40 to $34. Our earnings forecasts for fiscal year 2015 and 2016 were lower by 1% and 5% respectively than the average analyst forecast.

Valuation, target price, and risk. The new Oriental is 12 times times the 2015-year price-to-earnings ratio, a 44% lower than its peers in Asia. Our target price corresponds to 17.3 times times the 2016-year earnings ratio, which is expected to be unchanged from the composite annual growth rate of 17% per share in 2014-2016, a 20% lower than that of similar companies in Asia. Key downside risks include rising wages and rental costs, competition from Internet content providers and other knowledge-based service providers. (Ding Macro)