New Oriental stock rating maintained in overweight (overweight) unchanged

Piper Jaffray, the US investment Company, published a study today, keeping the nyse:edu stock rating "overweight" (overweight) unchanged and raising its target price from $29 to $33.

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

Reduction in registration, release of operating lever, maintenance of "overweight" rating

Conclusion：

We are still bullish on new Oriental's strategy to focus on expanding profitable learning centers, with increased utilization and rationalization of spending. We believe this will boost its operating profit margin in the next few quarters and expect the company to achieve 20% to 25% net profit growth over the next years time.

New Oriental's earnings per share exceeded Wall Street analysts ' expectations in the first quarter of the 2014 fiscal year, but revenues were lower than expected, mainly due to continued drag on enrollment growth in adult English training and Shanghai operations.

New Oriental's outlook for the second quarter of fiscal year 2014 exceeded analysts ' expectations, with overall registered growth improving over the past six weeks. The outlook for the new Oriental, which will grow 18% to 22% per cent year-on-year, will remain unchanged, while the outlook for its operating profit margin for the 2014 fiscal year has been revised by 100 basis points to 16% and 17%. At present, the speed of new Oriental Learning Center has slowed down.

We kept the new Oriental stock rating at "overweight" while raising our earnings forecasts for new Oriental and raising its target price from $29 trillion to $33 (based on the expected and 22.5 times-fold earnings per share of US depository receipts in fiscal 2014).

-fewer registrations, and an impressive rise in operating margins:

New Oriental first quarter revenue of 389 million U.S. dollars, lower than we expected 397 million U.S. dollars and Wall Street analyst average expected 398 million U.S. dollars; but the first quarter of new Oriental earnings per share of 0.81 U.S. dollars, is higher than we expected 0.76 U.S. dollars and Wall Street analyst average expected 0.78 dollars.

The number of students enrolled in the first quarter of the new Oriental growth rate was 2.3%, lower than our expected year-on-year growth of 3.6%, mainly due to the annual English training business and Shanghai business continues to drag the number of registered growth.

Despite disappointing first-quarter revenues, the operating profit margin of the new Oriental was 34.9% (up 470 basis points on a year earlier), far exceeding our expected 32.7%, mainly because of the small number of new learning centers that the company opened in the quarter, The downsizing of staff and the closure of 86 poorly performing learning centres in the past five quarters have led to better general and administrative spending levers.

-The number of registered people is bouncing back; second-quarter performance forecasts exceed expectations:

The top half of the second quarter registered a 8.3% per cent increase in student enrolment, which was better than the first quarter, while cash receipts rose 23% per cent year-on-year, mainly as companies entered the busy season of primary and secondary education.

The new Oriental expects a second-quarter revenue of $202.4 million to $210.7 million, better than our expected $195 million trillion and the average Wall Street analyst's expected $196 million trillion.

-Increase earnings per share forecast for fiscal year 2014:

We downgraded the new Oriental Revenue forecast for fiscal year 2014 slightly, as the company's first-quarter revenue failed to meet expectations, but also raised its earnings forecast for fiscal year 2014 from $1.14 to $1.18, below the average Wall Street analyst's expected $1.19 trillion. We estimate that the operating profit margin for the new Oriental 2014 is 16.1% (up 330 basis points), compared with the outlook for the operating margin of the new Oriental for the fiscal year 16% to 17%.

-Target price implementation risk:

The findings of the Securities and Exchange Commission (SEC), a slowdown in the market for overseas test preparation, competition, epidemics, the ability to achieve registered growth targets in an environment that slows the pace of new learning centers, reliance on standardized tests, government regulation, severe or prolonged economic slowdown.