Keep the new Oriental stock buying rating and increase the target price to 31 US dollars

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

Profit margin: After restructuring, the new Oriental profit margin has rebounded for the third consecutive quarter. We believe that the new Oriental slowdown in the pace of expansion, to strengthen operational efficiency strategy has been effective, and to promote corporate profit margins to 2011 and 2012 fiscal year levels. But the impact of the strategy, as well as the K-12 business seasonal downturn, corporate revenue growth has slowed.

Revenues were lower than Wall Street's expectations: New Oriental's first-quarter revenue for 2014 was 389 million U.S. dollars, up 15.8% from a year earlier. 2% lower than we and Wall Street expected, at the lower limit of company-directed expectations, mainly because of a slowdown in student numbers (up 2% per cent). But it is worth mentioning that the number of overseas test admissions increased by 4% per cent year-on-year, reversing the continuing downward trend for three consecutive quarters. The company's management said that the slowdown in the number of students was mainly due to the 1 per cent structural decline in the traditional adult education sector, 2 the net closure of 13 teaching centres in the first quarter, the increase of 62 teaching centres in the same period a year earlier, and the shift to small class/VIP training;

Net profit margins are better than expected: In the past few quarters, the new Oriental has largely completed the rationalization of teaching centers, especially those with less than 10% operating rates. Although the 66% gross margin is slightly below our expected 37%, the new Oriental has managed to cut its operating costs, especially its sales and marketing costs. To this end, the new Oriental EBIT (pre-tax profit) margin reached 36.2%, an increase of 4%. Based on non-US GAAP, the net profit margin was 33.9%, up 3.4% from the year earlier, better than we and Wall Street expected. Diluted earnings per share of 0.84 dollars, 1% higher than Wall Street expectations, 2% higher than our expectations.

Revenue in the second quarter was expected to be higher than Wall Street's expectations: New Oriental expects to add 20 to 30 teaching centers in the remaining quarters of fiscal year 2014. Revenue for the second quarter is expected to grow 22% to 27% year-on-year, 4% higher than our forecast and 6% higher than Wall Street expectations. In addition, the new Oriental is expected to increase operating margin of 100 benchmark points to 16% to 17%.

Valuation: We continue to maintain the new Oriental stock "buy" rating, the target share price increase of 14% to 31 U.S. dollars.