New Oriental Group released its financial report for the third quarter of fiscal year 2024, after which the Hong Kong stock New Oriental-S and its affiliated company Oriental Selection both fell sharply, but there were slight differences:
New Oriental-S opened low, once fell more than 18%, and then rebounded, and finally closed at HK$62.20, down 12.27%, and the decline narrowed.
The affiliated company Oriental Selection also opened lower, but the decline expanded all the way, closing at HK$15.96, a decrease of 9.42%. Why is there such a contradictory market movement?
1. New Oriental ripped off the fig leaf of selection?
3Q24 Results Overview (US$ 100 million):
-总收入：12.07亿(vs预期10.98亿)，+60.1% yoy; 4Q24指引11.02~11.27亿元，yoy+28~31%(vs预期10.96亿)。
-Gross profit: 609 million yuan (vs. 577 million expected), +58.4% yoy, corresponding gross margin: 50.5% (vs. 52.6% expected), a slight decrease of 0.5pp year-on-year.
-Selling expenses: CNY 154 million (vs. $161 million expected), corresponding to a sales expense ratio of 12.7% (vs. 14.7% expected), an improvement of 0.9pp year-on-year.
-Adjusted operating profit: CNY 141 million vs. CNY 139 million expected, corresponding to an operating margin of 11.7% vs. 12.7% expected, unchanged year-on-year.
-Adjusted net profit attributable to the parent company: 105 million yuan (vs. expected 132 million), +9.8% yoy; Adjusted net profit margin attributable to the parent company was 8.7% (vs. 12.0% expected), down 4.0pp year-on-year.
In a word, the revenue exceeded expectations, and the net profit attributable to the parent company fell short of expectations. This shows that although the revenue and operating profit have increased significantly, the growth of net profit has not matched it, and it has fallen into a situation of "increasing revenue but not increasing profits".
Subsequently, Goldman Sachs issued a research report, although it still maintained the "buy" rating of New Oriental-S (09901), but the target price was slightly reduced by 2% from HK$90 to HK$88; At the same time, it maintained a "neutral" rating on Oriental Selection (01797) and lowered its target price from HK$21.5 to HK$18.4.
Goldman Sachs lowered its price target, but it is not the key. The key thing is that this report releases information that Oriental Selection may be a loss in the third quarter.
According to public data earlier, Dongfang Selection's GMV in the third quarter increased by 75% year-on-year to RMB5 billion, mainly due to the "Walking with Hui" Douyin account, as well as the non-live broadcast contribution of Taobao, its own APP and self-operated products. Some institutions estimate that the revenue in the third quarter will be about 1.96 billion yuan, an increase of about 56% year-on-year, mainly due to the incremental contribution of GMV by the new account of "Walking with Hui"; Adjusted operating margin was 16% in the third quarter. Investors were looking forward to it, but the statement released by New Oriental showed the following:
Earnings attributable to non-controlling interests alone decreased by US$14 million, or nearly RMB100 million, compared with the same period last year.
At the subsequent performance exchange meeting, some investors asked the management: from the perspective of minority shareholders' interests, Dongfang Selection may lose money this quarter. So, how should we consider the impact of the fluctuation of the profit margin of Oriental Selection on the group, and how do we view the profit margin of FY25?
Management's response was: "We are not in a position to provide margin guidance on Oriental Selection at this time. Oriental Selection will provide more detailed and comprehensive financial information in its annual report. However, we are optimistic about the future development of Oriental Selection, which is expected to generate positive returns for the company and generate more revenue and profits for shareholders. ”
But this answer may seem ambiguous, but investors' interpretation is strikingly unanimous.
Second, the "collapse" of Dongfang Selection has just begun?
New Oriental's management mentioned that the reason for the decline in profits was due to "the cost of Dongfang's selection of self-operated products and live broadcast e-commerce business".
Zhou Chenggang, Chief Executive Officer of New Oriental, said that the Group continued to invest in the development of "Oriental Selection", strengthened the development of its self-operated products, and expanded to different channels to attract a larger customer base with products and live broadcast content.
At the beginning of April, Dongfang Selection officially launched the "Hour Delivery" service, first for the Beijing market, has established cooperation with 17 front warehouses, and the distribution scope covers 80% of the area within the Fifth Ring Road of Beijing, and will cover more cities in the future.
So the question for investors is, Dongfang Selection chooses to increase self-operated investment, will the performance of the next quarter be worse?
From the perspective of profit model, live broadcast e-commerce is a good business because it is "light"; Self-operated e-commerce is not a good business, because of the "heavy" - it is not difficult for self-operated to find factories to produce self-operated products on an OEM basis, but more self-operated products mean that more money needs to be invested, and more self-operated goods will also produce a large amount of inventory and more unsalable products.
In January this year, a stockholder posted on Xueqiu.com, putting forward "four questions about the soul" of Dongfang Selection:
1. Dongfang selection does not rely on Dong Yuhui
After the launch of the broadcast with Hui, this conclusion is obvious, the popularity of the Dongfang Selection live broadcast room has plummeted, and the anchors can only rely on the cost performance of the product to introduce single products, which will cause his gross profit margin to be greatly affected, which is no different from an ordinary live broadcast room and a merchant with tens of billions of subsidies, this gross profit margin is difficult to support the operating costs of Dongfang Selection's self-operated and independent APP. The gross profit and net profit behind will only be more ugly.
2. Does the logic of self-employment hold?
If Dongfang Selection and Dong Yuhui were not separated, they might be able to tell a story, but if they were separated, it would be a burden. The logic of self-operation is to reverse the supply chain through the scale effect, and exclusively customize unique SKUs with high cost performance at the same price.
The first is the scale, and Hui peers do not sell their own business, the scale plummets, and there is no scale effect at all. The second is the product itself, shrimp, grilled sausages, these single products, the same price, even if it is now after the promotion, there are too many alternative products on the market, cherries 2J five-pound Sam and 10 billion subsidies 198, Oriental Selection 228, where is the cost performance at the same price?
3. Standalone APP
This has QM data to see how bad the conversion data is, but anyone who knows a little bit of the Internet knows that the independent e-commerce platform with small and small scale SKUs is not established, as far as Jumei Youpin, Vancl Eslite, and as close as NetEase's NetEase Yanxuan, and finally has to rely on Taobao, Duoduo, Jingdong, and Douyin. This is a project that wastes money by telling stories to the capital market, and it is okay to deceive laymen.
4. What will happen after the Oriental Audition
There is a high probability that you can only rely on Dong Yuhui, Dong Yuhui sells his own business, and the independent APP is cut. It is best to cut off self-management, save expenses and operate with light assets, and earn as long as you want.
Retail and e-commerce are much more difficult than Xiao Sun and Dongfang Selection, don't step on a banana peel and really think you can ski.
It doesn't matter if this stockholder @"scrat investment notes" judges whether it will become a fact in the future.
The important thing is that under the "blessing" of the management to reduce their holdings and "sneak away", and with the confirmation of today's performance report of the parent company, many investors in the market now recognize this judgment.
Not only did investors defect, but also third-party institutions made amends.
Dolphin Investment Research pointed out that although Dongfang Selection currently contributes more than 20% of the group's revenue, its business model is poor, its profitability is low, and there are uncertainties such as high star anchor exodus, moral hazard, competition substitution, and supply chain management in the future.
Next, Oriental Selection will provide more detailed and comprehensive financial information in its annual report. Think about it, if the business does not improve in the fourth quarter, and if the overall investment sentiment of the Hong Kong stock market does not pick up by then, can it still support the valuation of 24 times?
3. Does New Oriental really increase revenue or profits?
"At the end of 2021, New Oriental, Good Future, Gaotu and other education and training leaders successively announced the end of K9 subject training, and turned to non-subject education, adult education, live broadcast e-commerce and other fields. At present, the transformation has begun to show results, New Oriental, Good Future and Gaotu have achieved positive growth in operating income in CY2Q23, +64%/+23%/+31% year-on-year respectively, and the non-GAAP net profit margins of New Oriental and Gaotu have turned positive, and the leading companies are gradually coming out of the painful period and ushering in a new stage of development. ”
It's just old news, but it's relevant to today's earnings report.
At the performance briefing on April 25, Yu Minhong, executive chairman of the board of directors of New Oriental, said that the overseas examination preparation and overseas consulting business in Q3 maintained a growth momentum, showing a year-on-year increase of about 52.6% and 25.7% respectively. At the same time, the domestic test preparation business for adults and university students recorded a year-on-year increase of approximately 53.2%. The revenue of new education business increased by 72.7% year-on-year.
According to the financial report, as of February 29, 2024, the total number of schools and learning centers was 911, an increase of 68 compared to 843 as of November 30, 2023, and an increase of 199 compared to 712 as of February 28, 2023. As of 29 February 2024, the total number of schools is 81.
Isn't it astonishing that such a high-speed business growth momentum and such a rapid expansion rate can it even be called a leader in the Hong Kong stock industry?
However, it will be faster next.
Management said that the retention and utilization rates of high school and K9 non-academic businesses are increasing quarter by quarter, and the current trend is still maintained, and higher utilization and higher retention rates can be seen in the future. A few years ago, it would have taken 12 months for a learning centre to break even. At present, it can be seen that this time only takes half a year. The company analyzed the supply and demand situation of the market before raising the expansion target by 30%.
Why is it so fast?
It is because of the message conveyed by that old message that the competitive environment of the industry is better than before, the small competitors in the market have been cleared out under the suppression of policies - and the supply-side reform of the education market has been completed. In a market where supply is less than demand, pricing power is firmly in the hands of the remaining leaders.
Some stocks are still cheap even if they are two or three times their book value, and if their market position implies growth inertia (a manager may be very good or the whole management system is very good, and can raise the price but has not yet used the ability to do so).
However, in general, it is more reliable to bet on the quality and development prospects of the enterprise than on the wisdom of managers. In other words, at this stage, New Oriental's performance growth will rely more on the company's active choice of expansion rhythm, and investors need to pay more attention to the company's "expansion" rhythm.
The management of New Oriental said that the decline in profits in 24Q3 was due to the slight loss of selection on the one hand, and the quarter-on-quarter improvement in Q4 would be improved, in addition to the increase in taxes and fees, the decrease in interest income, and the impact of equity method investment losses caused by the acquisition and selection, of which the decrease in investment income was mainly due to the treatment of the residual impairment impact of double reduction; Excluding the impact of selection, the profit margin of the main business of education was +2-3pct year-on-year. Looking ahead to 24Q4, RMB revenue is +34-37% YoY, and non-GAAP margin is expected to grow by 2-3% for the full year.
Fourth, summary
"Mix raisins with poop and you still get poop. ”
In the short term, human nature will be afraid, and under the domination of this emotion, today is another day when raisins and poop are mixed together.
For New Oriental Group, the parent company of 40x PE and 3.4x PB, a drawdown close to 20% may provide a better short-term buying point.
In the long run, history repeats itself. In the capital market, there has never been a shortage of cases of "cutting stupid businesses and returning to the original excellent old business".
Where will New Oriental and the "pro-son" Oriental Selection go? It will definitely be an unfinished and wonderful capital story.