New Oriental Earnings: Shares Tumble on Disappointing Margins and Uncertainty Surrounding East Buy

New Oriental’s fiscal 2024 (ending May) fourth-quarter revenue was 1% above the upper end of management guidance, but its sharp margin contraction is disappointing. Non-GAAP operating margin fell by 5.9 percentage points year on year to 3.2% due to the opening of new learning centers, extra employee compensation, and higher expenses related to East Buy, the livestreaming e-commerce business. We leave our fiscal 2025-26 revenue estimates unchanged but reduce our gross margin assumptions by 50 basis points each, leading to a 4%-5% cut in our earnings estimates. We now project USD 433 million in earnings for fiscal 2025, up 40% year on year. We keep our longer-term estimates and maintain our fair value estimate at USD 62/HKD 49. The American depositary shares fell 9% overnight and closed 1% above our fair value estimate. We recommend investors wait for more attractive entry points.