Goldman Sachs upgrades New Oriental to Buy, believing its valuation appeal is too compelling to ignore

Overview

This is a Goldman Sachs company research and rating change report on New Oriental. The core conclusion is that although Goldman Sachs slightly lowered its FY26-28E revenue and non-GAAP EPS forecasts and trimmed its target price from EDU US$67/9901.HK HK$52 to US$65/HK$50, it upgraded New Oriental from Neutral to Buy because the valuation is already at historical and peer lows, while net cash, free cash flow, and shareholder returns provide a margin of safety.

Core views

Goldman Sachs believes New Oriental's investment appeal mainly comes from four points: first, valuation excluding net cash is extremely low, with the current 12-month forward P/E at about 10-11x, around 1.5 standard deviations below the historical average; second, the company has abundant cash reserves, and net cash as a proportion of market capitalization is high among China internet and consumer peers; third, K-12, college exam preparation, and East Buy continue to support revenue growth, while cost optimization is expected to drive FY27E margin expansion; fourth, dividend and buyback commitments improve shareholder returns and may enhance ROE.

Analysis framework

The report uses top-down peer valuation comparisons, historical valuation percentiles, cash-adjusted valuation, sum-of-the-parts valuation, and earnings forecast revision analysis. Goldman Sachs values the traditional education business, new businesses, attributable value of East Buy, and net cash separately, then applies a 10% holding company discount to derive the 12-month target price. The report also compares market consensus with Goldman Sachs forecasts and believes there is still potential for upward revisions to FY26E/27E revenue and EPS.

Methodology notes

• Valuation frameworkSOTP

  Sum-of-the-parts valuation

  Goldman Sachs separately values high school tutoring, other traditional businesses and new businesses, attributable value of East Buy, and net cash, then applies a 10% holding company discount to derive the 12-month target prices for EDU and 9901.HK.

• Valuation multipleEV/NOPAT

  Operating asset valuation multiple

  The report applies 13x FY27E EV/NOPAT to high school tutoring and 12x FY27E EV/NOPAT to other traditional businesses and new businesses, with multiple selection based on revenue growth levels.

• Peer and historical comparisonForward P/E and ex-net-cash P/E

  Forward P/E and ex-net-cash P/E

  The report notes that New Oriental is currently trading at about 10-11x 12-month forward P/E, and about 3x CY26E P/E excluding net cash, placing it at the low end historically and versus China internet/consumer peers.

• Risk and attribute frameworkGS Factor Profile

  Comparison of growth, financial returns, valuation multiples, and composite factors

  Goldman Sachs discloses that its GS Factor Profile ranks stocks relative to the market and industry peers across growth, financial returns, valuation multiples, and composite metrics to provide investment context.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC (EDU / 9901.HK)

  Core covered company; upgraded by Goldman Sachs to Buy

  Strengths

  Low valuation, high net cash, long brand history, relatively comprehensive education service coverage, improving shareholder returns, and cost optimization likely to drive margin expansion.

  Weaknesses

  Overseas exam preparation and consulting business is expected to weigh on group revenue growth, FY26-28E forecasts were slightly lowered, and the business remains affected by education policy and demand changes.

  Comparison

  Compared with the China internet and consumer peers covered by Goldman Sachs, New Oriental's valuation excluding net cash is at a low level, while its revenue and EPS growth expectations are in a relatively strong percentile.

  Risks

  Declining K-12 population, pricing pressure, fluctuations in overseas study demand, AI substituting for or reshaping learning scenarios, weaker-than-expected margin improvement, and regulatory changes.

• East Buy (1797.HK)

  Related asset of New Oriental and a component of SOTP valuation; Goldman Sachs maintains Sell

  Strengths

  Douyin GMV growth beat expectations, and private label and channel recovery are still progressing.

  Weaknesses

  Valuation remains high relative to growth prospects and peers, and after the departure of top livestream hosts, it still needs to prove the sustainability of GMV, revenue, and earnings recovery.

  Comparison

  Goldman Sachs uses a target P/E of 15x for East Buy, with a target price of HK$12.4, and believes its valuation is expensive relative to China e-commerce platforms, dining, and home consumer brand peers.

  Risks

  If GMV growth, channel expansion, private label launches, parent company support, or new business development exceed expectations, they could constitute upside risk to the Sell rating.

Key data

• Rating changeBuy from NeutralGoldman Sachs upgraded New Oriental from Neutral to Buy.
• 12-month target priceEDU US$65 / 9901.HK HK$50Previously EDU US$67 / 9901.HK HK$52; slightly lowered this time but still with meaningful upside.
• Implied upside41% / 39%For EDU and 9901.HK, respectively.
• Net cashUS$5.4bnAs of 3QFY26; about 75% of market capitalization.
• Net cash excluding deferred revenueUS$3.6bnAbout 50% of market capitalization.
• Valuationabout 3x CY26E ex-net-cash P/EThe report says this is near the low end among the 140+ China internet and consumer stocks covered by Goldman Sachs.
• 12-month forward P/E10-11xAbout 1.5 standard deviations below the historical average.
• Shareholder return commitmentno less than US$490mn per yearTo be returned over the next three years through dividends and/or share buybacks, equivalent to about a 7% shareholder return yield.
• CY25-27E growth forecastRevenue 9%, non-GAAP operating profit 19%, non-GAAP EPS 15% CAGRAll in RMB terms, with growth levels close to the top quartile among China internet and consumer stocks covered by Goldman Sachs.
• 4QFY26E forecastRevenue US$1.5bn, +21% YoY; non-GAAP OPM 8.0%Goldman Sachs expects revenue and profitability to be above Visible Alpha consensus.
• East Buy target price and ratingHK$12.4, SellGoldman Sachs maintains a Sell rating on East Buy, believing its valuation remains high relative to growth and peers.

Impact & implications

The implication of the report for New Oriental is that the market may be underestimating the value of its cash, margin recovery, and shareholder return potential. If 4QFY26 results, FY27 cost optimization, and AI education product launches progress smoothly, the stock has room for valuation re-rating and upward consensus revisions. However, Goldman Sachs maintains a Sell rating on East Buy, indicating that it places greater emphasis on the valuation margin of safety and recovery of the core education business at the parent company level, rather than taking a broadly optimistic view on the related e-commerce asset.

Risks

• China's K-12 student population peaked in 2022 and declined by about 1%/2% in 2023/2024, which may further constrain industry TAM over the next five years.
• Intensifying competition, a weaker macro environment, or a stronger discretionary spending profile could create pricing pressure.
• Demand for overseas exam preparation and consulting may continue to be affected by macro and geopolitical factors.
• AI education hardware, self-study centers, and native AI applications may change learning scenarios and disrupt traditional education services.
• If cost control and organizational efficiency improvements fall short of expectations, opportunities for margin expansion and valuation re-rating may weaken.
• Regulation in China's education industry remains dynamic, and differences in local implementation may create operating uncertainty.

What to watch

• 4QFY26 results in late July, especially revenue, non-GAAP operating margin, and whether they exceed consensus expectations.
• Progress of AI education product launches in 2H26 and their impact on learning scenarios and business models.
• Whether FY27E cost reductions and workforce optimization translate into more visible margin expansion.
• Whether revenue growth in K-12 and China college exam preparation can offset pressure from overseas exam preparation and consulting.
• East Buy's GMV recovery on Douyin and other channels, expansion of private label, and profitability performance.
• Whether changes in cross-sector fund flows drive valuation re-rating for China internet and consumer stocks.