Back On A Profitable Track, New Oriental Pivots Towards Travel

Key Takeaways:

• New Oriental Education posted a profit of $177 million in its latest financial year, recovering from a $1.19 billion loss a year earlier  
• The group recently set up a tourism arm to explore opportunities in the so-called livestreaming plus travel sector  

By Ken Lo

China’s New Oriental Education & Technology Group Inc. EDU looks to have graduated from the school of hard knocks, after learning a lesson about diversification.

In the last couple of years, the education giant has struggled through a government crackdown on private companies providing tutoring to school students. The ban decimated parts of the education sector and sent New Oriental hurtling to a huge loss of $1.19 billion for the financial year ending in May 2022.

But the company has regrouped under founder Yu Minhong and bounced back into the black in its latest annual results, after branching out into livestreaming and e-commerce. The company is now widening its horizons again with the aim of breaking into travel-related services, drawn by surging demand for stimulating experiences and cultural enrichment since Covid restrictions were lifted.

New Oriental announced last Wednesday that it made a net profit of $177 million in the financial year ending in May, despite a slight drop in revenue. Revenue slipped 3.5 % from the prior year to nearly $3 billion, a multi-year low, but the profit margin of 6.3% marked a big turnaround from the previous year’s figure of minus 31.6%. CFO Stephen Yang said he was excited to see such encouraging results.

The recovery has been driven by earnings from new educational ventures as well as the push into livestreaming and e-commerce through East Buy Holding Ltd. (1797.HK), a New Oriental subsidiary formerly known as Koolearn.

In the fourth quarter alone, New Oriental’s revenue climbed just over 64% to $861 million, and its net profit approached $29 million, swelled by educational sales and rising income from proprietary East Buy products and e-commerce.

The group cited strong post-pandemic demand for a range of educational services in the final quarter. Revenue from overseas test preparation services jumped around 52%, while income from consultancy about overseas study rose 6% year on year. In the domestic market, test preparation for adults and university students pursuing further studies in China logged a 34% year-on-year leap, and the group’s total number of schools and training centers rebounded to 748.

New educational operations also gathered pace. Its non-academic tutoring business was operating in about 60 cities in the fourth quarter, with 629,000 enrolled students.  About 60 cities had also adopted Its intelligent learning system and devices, with 99,000 paid active users in the quarter, feeding into the better-than-expected profits.

Livestreaming e-commerce, which gave the company a new lease of life in the first half of the year, continued to contribute to revenue growth, the company said, although it did not provide any specific figures. East Buy made significant progress in increasing the variety and scale of its offerings, according to the company statement, organizing livestreaming in many provinces to promote knowledge and appreciation of Chinese culture.

The group forecast revenue of between $983 million and $1,006 million in the first quarter of the current financial year, a year-on-year increase of between 32% and 35%.  On the Hong Kong market, the upbeat forecast boosted New Oriental’s shares, which rallied as high as HK$46.50 in a three-day winning streak, with a cumulative gain of 16.8% from HK$39.80. Jefferies Group, a brokerage, raised its price target for New Oriental to HK$67 from HK$55, citing robust demand for the group’s new products, limited competition from rivals and reduced policy risks.

However, China’s livestreaming e-commerce ecosystem has been struggling to attract new traffic and avoid stagnation. With China’s economic growth slowing, consumers are becoming more cautious about their spending. Growth in transaction rates for livestreaming e-commerce has plummeted from nearly 590% in 2018 to just over 48% last year. Therefore, investors may doubt whether the business can continue to be a powerful growth engine for New Oriental.

In the half year to end-November 2022, East Buy reported its gross merchandise value (GMV) for the period had reached 4.8 billion yuan ($670 million). The number of its followers on the short-video platform Douyin, a Chinese version of Tiktok, stood at 35.2 million, and paid orders on Douyin totaled 70.2 million.

However, according to Haitong Securities, there are signs of a possible slowdown. In the first quarter East Buy’s average daily GMV fell below 20 million yuan, implying a total GMV of only 1.8 billion yuan for the period, Haitong said.

Travel Bonanza

With bottlenecks in some of its businesses, the company has had to find alternative routes to sustainable, long-term growth. One of those avenues is the travel business, as tourism demand has exploded this year since China emerged from repeated rounds of pandemic restrictions.

Even armchair travel can be monetized, as livestreamed travelogues encourage consumers to book actual trips or buy the tourist destination’s products online. The so-called “live streaming plus travel” business is flourishing, offering profit opportunities for New Oriental.

Since the start of the year, East Buy has crisscrossed the country to sell produce and showcase the natural beauty of locations across China. The “Shanxi Trip” in May took in many cities including Taiyuan, Datong, Shuozhou and Xinzhou, featuring more than 100 livestreamed Shanxi products with sales exceeding 75 million yuan. In July, Yu Minhong personally hosted a livestreamed event in Gansu that attracted nearly 50 million viewers. Short videos related to the event were played more than 200 million times.

New Oriental set up a cultural tourism venture on July 19 with registered capital of 1 billion yuan, according to data from the enterprise credit agency Qichacha. The new business is described as spanning travel services, cultural and artistic exchanges, creative activities and online sales.

Existing programs such as international study tours and domestic camps are aimed at teenagers, but New Oriental’s venture is targeting a different demographic: middle-aged and elderly travelers. The group’s diverse operations, from the latest travel project to the core education and livestreaming businesses, cater to a wider customer spectrum and offer an advantage over peers in the pure education sector.

New Oriental’s price-to-earnings (P/E) ratio is about 58.8 times, a far higher multiple than the 14.4 times for Scholar Education Group (1769.HK), a fellow explorer in the livestreaming e-commerce space. The higher premium may reflect New Oriental’s broader scope, while indicating that investors have faith in the founder’s mission to transform the company.