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1、36,32,28,24,New Oriental,1,2,Deutsche BankMarkets Research,RatingBuyAsiaChina,CompanyNew Oriental,Date30 January 2013Forecast Change,ConsumerEducation Services,Reuters,Bloomberg,Exchange Ticker,Price at 28 Jan 2013(USD)Price target-12mth(USD)52-week range(USD),17.9021.0028.82-9.50,EDU.N,EDU US,NYS,E
2、DU,HANG SENG INDEX,23,672,FY2Q13 results:margin recovery,tougher than expectedCore markets underperformance led by structural changeNew Oriental(EDU)recorded a top line of USD165.9m(+30%yoy)in FY2Q13,which was in line with consensus and our estimates,backed by the strongperformance in the K-12 and V
3、IP segments.However,student enrollmentswitnessed meager 7.2%yoy growth given 1)the underperformance in Beijingand Shanghai core markets,2)significantly intensifying competition in theoverseas test prep segment,and 3)troughed utilization.In the quarter,EDUalso kickstarted headcount reductions and exp
4、ansion moderation.Margin erosion wider than expected as utilization hits trough,Vivian HaoResearch Analyst(+852)2203 Paul Ginocchio,CFAResearch Analyst(+1)415 617-Key changes,EDU recorded an EBIT loss of USD26.9m,missing the consensus estimate ofUSD9.8m by a wide margin,but better than the loss we e
5、stimated ofUSD35.1m.We believe the deeper-than-pre-signaled margin dilution is mainlydue to 1)structural shifts that led to de-leveraging and overseas test prepsegment underperformance,2)overhead inflation induced by overly aggressiveexpansion,and 3)one-time expenses incurred for SEC investigations.
6、,Price targetSales(FYE)Op profmargin(FYE)Net profit(FYE),22.00 to 21.00 990 to 968 12.4 to 11.2 132.8 to 120.2,-4.5%-2.2%-9.5%-9.5%,Profitability recovery a thorny way down the roadDespite healthy top-line guidance by management(25-30%yoy)for FY3Q13,we expect EDU to continue to witness slowing enrol
7、lment growth in the nearterm due to the changing market landscape.We also expect robust ASPgrowth to sustain and margins to continue to face strong headwinds for therest of FY13.,Price/price relative2016,Reducing target price by 5%to USD21;maintaining Buy;valuation&risksGiven the moderated enrollmen
8、t growth outlook for overseas test prep and a,1281/11,7/11,1/12,7/12,likely prolonged margin recovery process,we reduce our net revenue and,GAAP net income estimates by 2.2%/5.2%and 9.4%/6.7%for FY13/14,HANG SENG INDEX(Rebased),respectively.As such,we lower our target price by 5%to USD21,still based
9、 ona 20 x PE against CY13E GAAP EPS of USD1.02 and a PEG of 0.8x,on anearnings CAGR of 25%over CY12-15E.Our revised target price generates 17%upside potential while EDU has de-rated along with the education sector.We,Performance(%)AbsoluteHANG SENG INDEX,1m-6.44.4,3m7.29.9,12m-27.215.5,maintain our
10、Buy rating.Key risks:macro softness,continuedunderperformance in core markets,and unfavorable regulatory changes.Forecasts And Ratios,Year End May 31Sales(USD)EBITDA(USD)Reported NPAT(USD)Reported EPS FD(USD)DB EPS FD(USD)%ChangeDB EPS Growth(%)PER(x),2011A557.9112.7101.80.650.650.0%29.839.3,2012A77
11、1.7143.9132.70.850.850.0%29.731.9,2013E967.8132.0120.20.770.77-9.5%-9.423.4,2014E1,204.2209.1188.71.201.20-6.7%56.914.9,Source:Deutsche Bank estimates,company dataDB EPS is fully diluted and excludes non-recurring itemsMultiples and yields calculations use average historical prices for past years an
12、d spot prices for current and future years,except P/B which usesthe year end close_Deutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors shouldbe aware that the firm may have a conflict of interest that could affect the ob
13、jectivity of this report.Investors shouldconsider this report as only a single factor in making their investment decision.DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012.,30 January 2013Education ServicesNew Oriental,Model updated:29 January 2013,Fiscal year end 31
14、-May,2009,2010,2011,2012,2013E,2014E,Running the numbers,Financial Summary,AsiaChinaEducation ServicesNew Oriental,DB EPS(USD)Reported EPS(USD)DPS(USD)BVPS(USD)Weighted average shares(m)Average market cap(USDm),0.400.400.002.31492,131,0.500.500.002.81512,872,0.650.650.003.61533,931,0.850.850.004.415
15、54,178,0.770.770.264.91552,742,1.201.200.415.71552,742,Reuters:EDU.N,Bloomberg:EDU US,Enterprise value(USDm),1,816,2,452,3,314,3,372,1,859,1,693,Valuation Metrics,Buy,P/E(DB)(x)P/E(Reported)(x),36.036.0,37.937.9,39.339.3,31.931.9,23.423.4,14.914.9,Price(28 Jan 13)Target Price52 Week rangeMarket Cap(
16、m),USD 17.90USD 21.00USD 9.50-28.82EURm 2,038USDm 2,742,P/BV(x)FCF Yield(%)Dividend Yield(%)EV/Sales(x)EV/EBITDA(x)EV/EBIT(x),5.993.80.06.225.429.8,8.334.30.06.327.331.7,7.994.30.05.929.434.7,6.084.30.04.423.428.9,3.654.01.41.914.117.1,3.148.32.31.48.19.3,Company Profile,Income Statement(USDm),New O
17、riental Education&Technology Group is the largestlisted private educational services provider in China interms of number of program offerings,studentenrollments and geographical coverage.The companystarted operations in 1993 when founder Michael MinhongYu(currently the companys chairman and CEO)open
18、edthe first school in Beijing to offer TOEFL test preparationcourses.New Oriental was listed on the New York StockExchange in September 2006.Its headquarters is inBeijing.Price Performance36322824201612,Sales revenueGross profitEBITDADepreciationAmortisationEBITNet interest income(expense)Associates
19、/affiliatesExceptionals/extraordinariesOther pre-tax income/(expense)Profit before taxIncome tax expenseMinoritiesOther post-tax income/(expense)Net profitDB adjustments(including dilution)DB Net profit,293182721006170016870061061,386240901207760008460078078,55833711316196130011108001020102,77247014
20、42611172700014311001330133,9685591322301082600013414001200120,1,2047142092801813100021223001890189,8Jan 11Apr 11 Jul 11 Oct 11Jan 12Apr 12 Jul 12 Oct 12,Cash Flow(USDm),Cash flow from operations,97,142,216,249,159,290,New OrientalMargin Trends28242016,HANG SENG INDEX(Rebased),Net CapexFree cash flow
21、Equity raised/(bought back)Dividends paidNet inc/(dec)in borrowingsOther investing/financing cash flowsNet cash flowChange in working capital,-1681-3000-54610,-19123-1800-792637,-47169600-1403681,-68181100-7111169,-491110-41087816,-602300-640016674,128,09,10 11EBITDA Margin,12,13EEBIT Margin,14E,Bal
22、ance Sheet(USDm)Cash and other liquid assetsTangible fixed assetsGoodwill/intangible assets,3151107,4201187,47316016,4822046,5602306,7262626,Growth&Profitability,Associates/investmentsOther assets,037,052,14470,323113,323143,323166,5040302010,252015105,Total assetsInterest bearing debtOther liabilit
23、iesTotal liabilitiesShareholders equityMinorities,46901181183510,59601691694280,86302892895740,1,12904384386900,1,26204854857770,1,48405825829020,0,09,10,11,12,13E,14E,0,Total shareholders equityNet debt,351-315,428-420,574-473,690-482,777-560,902-726,Sales growth(LHS),ROE(RHS),Key Company Metrics,S
24、olvency,Sales growth(%)DB EPS growth(%),45.626.9,32.026.5,44.429.8,38.329.7,25.4-9.4,24.456.9,0-20-40-60-80-100-120,09,10,11,12,13E,14E,EBITDA Margin(%)EBIT Margin(%)Payout ratio(%)ROE(%)Capex/sales(%)Capex/depreciation(x)Net debt/equity(%)Net interest cover(x),24.420.80.018.85.51.5-89.7nm,23.220.00
25、.020.05.11.6-98.1nm,20.217.10.020.38.92.9-82.4nm,18.615.10.021.09.32.6-69.9nm,13.611.233.116.45.02.1-72.1nm,17.415.033.222.55.02.1-80.5nm,Source:Company data,Deutsche Bank estimates,Net debt/equity(LHS)Vivian Hao+852 2203 6241Page 2,Net interest cover(RHS),Deutsche Bank AG/Hong Kong,30 January 2013E
26、ducation ServicesNew OrientalKey results takeawayUnderperformance of core markets led by structural changeEDU booked a top line of USD165.9m(+30%yoy)in FY2Q13,which was in line withconsensus and our estimates,backed by the strong performance in the K-12(enrollment+14%and revs+50%yoy)and VIP segments
27、(enrollment+25%and revs+38%yoy).Geographically,new markets in tiers 2 and 3 heavy-lifted the groups topline,with 40%yoy growth.However,student enrollments witnessed a meager 7.2%yoy growth given:1)The underperformance of Beijing and Shanghai core markets.Beijingcontributed 41%and Shanghai contribute
28、d 16%of total overseas test prepenrollment in FY12.Approximately 50%of revenue in these markets came fromthe overseas test prep segment.While the Beijing market still managed togrow 26%yoy in revenue,Shanghai only saw a flattish 4%yoy growth on atrough average utilization rate of 25%in FY2Q13.Cannib
29、alization from lower-tier new markets remains a key root cause of this flat growth;2)Significantly intensifying competition in the overseas test prep segment fromprivate new entrants(public school-affiliated overseas test prep serviceproviders and start-ups by departing star teachers).This competiti
30、on isreflected in the 7%yoy decline in overseas test prep enrollment;and3)Low utilization and inefficiency due to negligent operational control andoverly aggressive expansion in the past year.In the meantime,ASP saw 21%yoy growth,which we believe is a combined result ofpricing inflation and further
31、sales mix shift to smaller classes.Figure 1:EDUs quarterly major segmental enrollment growth,Oversea test prep,K-12,80%70%60%50%40%30%20%10%0%-10%-20%1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13Source:Company data,Deutsche Bank AG/Hong Kong,Page 3,800,30
32、January 2013Education ServicesNew OrientalMore conservative and prudent expansion planningEDUs learning center network reached 744 centers in November 2012,with only 18new additions in FY2Q13(cf.62 new additions in the previous quarter and 39 a yearago),which we believe signifies the start of ration
33、alization on scale and operatingefficiency.In addition to slowing center openings,EDU reduced its total headcount by1,500 during the quarter as part of the cost-control effort.,Figure 2:EDUs student enrollments and revenue growth,Figure 3:EDUs learning center expansion,0003,000,Total student enrollm
34、ents(12M rolling),Revenue,12M rolling,RHS(US$m),900,Total number of schools and learning centers,YoY growth in LCs(RHS),70%,2,5002,0001,500,800700600500400,700600500400,60%50%40%30%,300,1,000500-Source:Company data,3002001000,2001000Source:Company data,20%10%0%,Margin erosion wider than we expected
35、as utilization hits troughEDU recorded a gross profit of USD85.2m,compared to the consensus estimate ofUSD88.2m(-3.4%),resulting in a margin of 51%,176bps lower than consensusestimates but largely in line with Deutsche Bank estimates.Consequently,EDU recorded an EBIT GAAP loss of USD26.9m,compared t
36、o theconsensus estimate of USD9.8m;however,this was better than the USD35.1m loss weestimated,due to better-than-expected G and4)Expenses incurred for SEC investigations of around USD3m.Accordingly,EDUs bottom line came in at a loss of USD15.8m(USD9m non-GAAP),compared to consensus and Deutsche Bank
37、 loss estimates of USD6.5m and USD28.5m(USD3.1m and USD22.1m non-GAAP),respectively.Thus,the companys GAAP andnon-GAAP EPADS were-USD0.1 and-USD0.06,respectively.,Page 4,Deutsche Bank AG/Hong Kong,30 January 2013Education ServicesNew OrientalFigure 4:FY2Q13 results review,Year to 31 MayUS$m,2QFY13Ac
38、tual Consensus%delta,2QFY12Actual,1QFY13Actual,2QFY13DB est.,2QFY13Actual,YoY%,QoQ%,Delta%,RevenueGross profit,165.985.2,166.088.2,-0.1%-3.4%,127.268.8,335.8217.6,164.785.6,165.985.2,30%24%,-51%-61%,1%0%,EBIT(GAAP)EBIT(Non-GAAP)Net income(GAAP)Net income(Non-GAAP),(26.9)(20.1)(15.8)(9.0),(9.8)174.1%
39、(6.5)144.1%(3.1)193.3%,(3.2)1.03.37.5,101.6108.395.9102.6,(35.1)(28.8)(28.5)(22.1),(26.9)(20.1)(15.8)(9.0),729%-2124%-576%-219%,-126%-119%-116%-109%,-24%-30%-45%-60%,EPADS(GAAP),Diluted,-$0.10,-$0.04,149.6%,$0.02,$0.61,-$0.18,-$0.10,-573%,-116%,-45%,EPADS(Non-GAAP),Diluted,-$0.06,-$0.07,-18.9%,$0.05
40、,$0.65,-$0.14,-$0.06,-218%,-109%,-60%,Margin analysis(%),Gross marginEBIT margin GAAP)EBIT margin(Non-GAAP)Net margin(GAAP)Net margin(Non-GAAP)Effective tax rate(%),51%-16%-12%-10%-5%20%,53%-6%-4%-2%,-2%-10%-6%-4%,54%-3%1%3%6%-29%,65%30%32%29%31%12%,52%-21%-17%-17%-13%0%,51%-16%-12%-10%-5%20%,-3%-14
41、%-13%-12%-11%49%,-13%-46%-44%-38%-36%8%,-1%5%5%8%8%20%,Source:Deutsche Bank,Company data,Bloomberg Finance LPProfitability recovery a thorny way down the roadEDU management guides for a top line of USD212-221m for FY3Q13(+25-30%like-for-like yoy),in line with Street estimates of USD218m.Management a
42、lso indicated ahealthy rebound in overseas test prep enrollment(15%yoy)in the first two months ofthe coming quarter.However,we believe EDU is likely to:Continue to witness slowing enrollment growth in the near term,especially inthe overseas test preparation segment,due to competition and cannibaliza
43、tionin the sub-segments,which should be partially offset by strength in the K-12segment and cross-selling.We also believe robust ASP growth is likely to sustain due to further mix-shiftchange and pricing power andMargins should continue to face strong headwinds for the rest of FY13 due tohigher-than
44、-expected breakage costs and duration(with an additional 2,500headcount reduction planned in the next few quarters)before the cost-savingseffect takes place.Although EDU has begun efforts to improve utilization and rationalize costs,we believethis will be a more prolonged process than management ori
45、ginally planned.,Deutsche Bank AG/Hong Kong,Page 5,to,30 January 2013Education ServicesNew OrientalEstimate revisionsGiven the worse-than-expected underperformance in key markets and near-termpressure on margins resulting from the aggressive expansion in the past,we adjust ourearnings estimates as f
46、ollows.Net revenuesDecreased by 2.2%/5.2%to USD968m/USD1,204m for FY13/14E,respectively,with a more conservative enrollment assumption for theoverseas test prep segmentIn line with consensus estimates of USD969m/USD1,212m,with amarginal deviation of-0.1%/-0.6%in FY13/14EThese estimates indicate a 24
47、.4%three-year FY12-15 CAGR,cf.ourprevious estimate of 28.5%.Gross profit and marginDecreased by 5.2%/9.2%to USD559m/USD714m for FY13/14E,respectively,to reflect further reduction in teacher-to-student ratios and aprolonged margin recovery-3.8%/-1.1%cf.consensus estimates of USD581m/USD722mGenerates
48、a margin of 57.8%/59.3%,-180bps/-260bps cf.our previousestimates of 59.6%/61.8%Indicates a 24.0%three-year FY12-15E CAGR cf.our previous estimate of29.9%EBIT GAAPAs a result of the above revisions,decreased by 11.4%/7.4%toUSD108m/USD181m for FY13/14E,respectively-23.1%/-2.5%cf.consensus estimates of
49、 USD141m/USD186mGenerates margins of 11.2%/15.0%,for FY13/14,respectively,-1.0%/-0.4%cf.previous estimates of 12.4%and 15.4%Indicates a 29.9%three-year FY12-15E CAGR cf.previous estimate of33.4%EBIT non-GAAPDecreased by 9.5%/6.5%to USD134m/USD208m for FY13/14EGenerates margins of 13.8%and 17.2%cf.pr
50、evious estimates of 14.9%and 17.5%As a result:Net income GAAP,Decreased by,8.2%/6.7%,USD120m/USD189m,for,FY13/14E,respectively-13.8%/-1.5%cf.consensus estimates of USD139m/USD192m.Generates a margin of 12.6%/15.7%cf.previous estimates of 13.4%and15.9%,Page 6,Deutsche Bank AG/Hong Kong,to,30 January
