New Oriental stock rating remains unchanged at buy

Deutsche Bank today released its research report, keeping the nyse:edu's stock rating at "buy" unchanged and raising its target price from $31 to $37.

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

Fiscal year 2014 review: significant leverage; online business is still in its infancy

-strong performance benefits from significant leverage:

In the second quarter of 2014, the new Oriental performance was strong, with net revenue of $208.3 million (up 26%), 2% and 1% higher than we expected and Wall Street analysts, mainly due to: 1 enrollment growth (up 11.8%) and 2 per cent of the average price of the product increased steadily.

In addition, the implementation of the new Oriental in its rationalization strategy has been strong, with significant leverage (3% per cent of the operating profit margin of the U.S. General accounting standard, usually a break-even). As a result, the US depository receipts for the second quarter of the new Oriental earnings were $0.06 trillion, far better than we expected-$ 0.04 trillion and Wall Street analysts ' average forecast of $0.01 trillion.

At the same time, we believe that New Oriental's new online education program is still at a very early stage and may be susceptible to competition. We keep the new Oriental stock rating in the "buy" unchanged.

-Increased enrolment in primary and secondary school counselling services:

New Oriental in the second quarter of the total enrollment of 565,100 people (up 11.8%), the main impetus from the primary and secondary school guidance business (registered increase of 16%), of which the "You-can" business registered a year-on-year increase of 30%, the number of registered overseas examination business has declined slightly year-on-year. As a result, the new Oriental education revenue is 17% higher than we expected.

In addition, the new Oriental product portfolio is moving towards higher-priced classrooms and contributing to its revenue growth.

-Continue to implement rationalization strategies; online business can be challenged

New Oriental is continuing its rationalization strategy, with only 5 new learning centres opened in the second quarter and 11 learning centres closed. The result of stringent cost control measures is that the total operating expenditure of the new Oriental is 12% lower than we expected.

Meanwhile, New Oriental is considering launching a new plan for its online strategy. We believe that new Oriental will focus on adult-oriented curricula, which may have a self-destructive effect on its offline curriculum, because the company will face more competition on pricing issues and further expand its business scope.

-Increase the target price from USD 31 to $19.4% to $37:

We maintain our expectations of net revenue for new Oriental and increase the earnings per share of its fiscal year 2014 and 2015 (not in accordance with US GAAP) by 11% and 9% respectively.

The new target price we set for new Oriental shares is based on a 1 time-fold increase in the market-share growth rate (unchanged), a composite annual growth rate of 23% between fiscal year 2014 and 2016 (previously expected to be 22%), and 2014-fold (previously expected to be 23 times). We keep the new Oriental stock rating in the "buy" unchanged.

Risk：

New Oriental faces competition from new entrants who focus on networking products.