F27 growth guidance is solid, and the second phase of cost reductions is expected to continue releasing earnings leverage

Overview

After New Oriental's F4Q26 results release, Morgan Stanley held a non-deal roadshow with the company's CFO and investor relations team, focusing on F27 operating guidance, the second phase of the cost-reduction plan, and the outlook for each business segment. Management expects revenue to maintain relatively rapid growth, while driving margin improvement through organizational integration, customer acquisition channel optimization, and efficiency gains from artificial intelligence.

Core views

The main pillars of F27 growth are K12 education, domestic test preparation, and continued learning center expansion. Capacity growth below revenue growth, together with improved retention rates and easing industry competition, is expected to enhance efficiency per center. The overseas business has shown signs of stabilization, and domestic test preparation margins have improved significantly; the culture and tourism business remains a drag on profitability, but management will prioritize narrowing losses. Overall fundamentals are moving in a positive direction, but the price target is below the reference share price, so a neutral allocation view is maintained.

Analysis framework

The report combines management roadshow information, Morgan Stanley ModelWare earnings forecasts, and discounted cash flow valuation to assess revenue growth, capacity expansion, margins, and cost-reduction potential by business segment, and identifies key variables through bull and bear scenarios.

Methodology notes

• valuation methoddiscounted cash flow model

  determine base-case value by discounting future free cash flows

  The base case uses discounted cash flow valuation, with key assumptions including a 14% weighted average cost of capital and a 3% perpetual growth rate, to reflect market share gains and earnings growth potential.

• earnings forecastMorgan Stanley ModelWare

  proprietary institutional financial forecasting framework

  Unless otherwise stated, the report's financial metrics are based on Morgan Stanley ModelWare; consensus data is provided by Refinitiv Estimates, and forecast values are estimated by Morgan Stanley Research.

• segment analysisbusiness segment driver analysis

  break down revenue, margins, and operating drivers by business

  The report separately assesses the growth rates, margins, and risks of K12, domestic test preparation, overseas business, culture and tourism business, and new businesses.

Asset mapping & comparison

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

• New Oriental Education & Technology (EDU.US)

  core research subject

  Strengths

  Strong brand recognition, resilient growth in the K12 business, notable growth and margin improvement in domestic test preparation, learning center expansion and improved retention supporting market share growth, and second-phase cost reductions providing earnings leverage.

  Weaknesses

  The culture and tourism business remains loss-making, the overseas business is only at a stabilization stage, and profitability visibility for some new businesses and livestreaming e-commerce is low.

  Comparison

  Morgan Stanley assigns an Equal-weight stock rating and an Attractive industry view, implying that the company's risk-adjusted return is expected to be broadly in line with the average level of the covered education sector portfolio, while the overall industry remains attractive relative to the broader market.

  Risks

  Intensifying competition, uncertainty in livestreaming e-commerce revenue and profitability, changes in education regulation, cost-reduction execution falling short of expectations, and weaker-than-expected recovery in overseas study demand.

Key data

• F27 total revenue guidance18% YoY growthManagement also expects slight expansion in operating margin.
• F27 learning center capacity growth10% to 15% YoY growthCapacity growth is expected to be below revenue growth; F26 capacity increased 13% YoY, and the retention rate improved by 4 percentage points YoY.
• F26 first-phase cost savingsapproximately US$100mnMainly from measures such as rent negotiations and rationalization of marketing spending.
• F27 second-phase incremental savingsmore than US$100mnKey areas include organizational integration, lowering customer acquisition costs, optimizing digital marketing, and improving efficiency through artificial intelligence.
• Domestic test preparation F4Q26 revenue growth29% YoY growthThe company provided relatively cautious F27 guidance of 15% YoY growth.
• Domestic test preparation operating marginincreased from 6% in F26 to over 13%The long-term target is above 20%.
• Expected K12 business growthabout 20% or aboveSupported by learning center expansion, market share concentration toward leaders, and declining competitive intensity.
• Culture and tourism business loss targetbelow Rmb150mn in F27The loss in F26 was Rmb180mn, and F27 revenue is expected to be flat to modestly higher.
• F27 net revenue forecastUS$6,659mnMorgan Stanley forecast, representing growth of about 17.6% versus the F26 forecast of US$5,661mn.
• Key valuation assumptionsweighted average cost of capital of 14%, perpetual growth rate of 3%Used in the discounted cash flow base case.

Impact & implications

If revenue growth outpaces capacity expansion and the second phase of cost reductions is implemented as planned, New Oriental's center utilization, operating leverage, and free cash flow are expected to improve. Domestic test preparation and K12 will be the main near-term growth engines, while stabilization of the overseas business and reduced losses in culture and tourism can provide additional earnings leverage. However, the current share price is slightly above the price target, indicating that the market has already priced in a substantial portion of expected operating improvements; future excess returns will depend more on cost reductions exceeding expectations, growth in new businesses, or a stronger recovery in overseas demand.

Risks

• Renewed intensification of competition in the education and training industry could weigh on customer acquisition efficiency, revenue growth, and margins.
• Revenue and profitability visibility for the livestreaming e-commerce business is lower than for the core education business.
• Regulatory policies for high school and non-academic tutoring may change.
• Execution of the second phase of cost reductions, organizational integration, and AI-driven efficiency gains may fall short of expectations.
• Weak growth or less-than-targeted loss reduction in the culture and tourism business could continue to drag on overall profitability.
• Learning center expansion, retention rates, or recovery in overseas study demand may fall short of expectations.
• Morgan Stanley has potential conflicts of interest with the research subject, including investment banking, non-investment banking services, and shareholdings; investors should use this report as only one factor in their decision-making.

What to watch

• Delivery against guidance for 18% YoY revenue growth in F27 and slight expansion in operating margin.
• Whether learning center capacity growth can be kept within 10% to 15%, and whether revenue growth can continue to exceed capacity growth.
• Whether the second phase of cost reductions can achieve more than US$100mn in incremental savings in F27.
• Progress in raising the domestic test preparation operating margin toward the long-term target of above 20%.
• Whether the K12 business can continue to achieve growth of about 20% or above and gain market share.
• Recovery in overseas business revenue, employee engagement, and margin improvement.
• Whether culture and tourism business losses can narrow to below Rmb150mn.
• Growth performance of non-academic tutoring, intelligent learning devices, vocational training, and other new businesses.
• Changes in education regulation, industry competitive intensity, and overseas study demand.