New Oriental Education &Technology:Above expectations,Early registration leads to stronger enrollments

What surprised us

New Oriental (EDU) reported above expectation 2QFY17 revenues. Netrevenues of US$341mn (+23% yoy) were 6%/3% above GHe/consensus.

Non-GAAP EPADS of US$0.08 was in line with both GHe/consensus.

3QFY17 revenues were guided to US$408.7-421.8mn, +20% yoy at themidpoint (+25-29% yoy excluding the impact from Rmb depreciation), inline with both GHe/consensus.

What to do with the stock

(1) Management attributed the +75%/81% yoy enrollment growth in U-Canand POP Kids program due to: a) strong underlying market demand andmarket share gain; b) good retention rates on improved O2O products; c)early enrollments especially in the POP Kids spring program. We believethe third factor has the largest impact. Apple-to-apple hourly ASPs for UCan/POP Kids/OTP were up 2%/8%/7% yoy in RMB terms, resulting inblend ASP +2% yoy. (2) Operating margin expansion was fueled by 200bpsimprovement in utilization rate (20-21% in 2Q17). The retention rate postsummer promotion achieved 50% for Beijing, Shanghai and Wuhan whilethe retention rate is 70-75% for normal K12 courses. (3) In terms ofexpansion, the company plans to add 50-60 new learning centers (higherthan previous 40-50 guidance) and enter 2-3 new cities for the K-12business in FY2017 on strong market demand. The dual-teacher model isto be rolled out to 18-20 existing cities and enter 5-7 lower tier cities by theend of FY17. Management reiterated OPM targets of 17-18% in FY19-20.

We model 20% revenue growth and non-GAAP OPM 15.3% in FY17E; liftour FY17E-19E EPS by 2-10% to reflect the strong K12 segment and marginexpansion outlook, thus raising our 12m TP to US$56 (was US$51; stillbased on 20X CY2018E P/E). Maintain Neutral rating. Key risks: (+/-)demand, competition and network expansion.