New Oriental’s revenue momentum remains intact, but Goldman Sachs cuts margin expectations

Why hasn’t revenue growth improved margins?

New Oriental’s revenue in the first quarter of fiscal 2027 rose 23% year over year in US dollar terms and 17% in renminbi terms. Overall and segment revenue were broadly in line with Goldman Sachs’ expectations, but the group’s non-GAAP operating margin fell 0.3 percentage points year over year.
The core education business’s operating margin rose 0.2 percentage points year over year, but was still 0.9 percentage points below Goldman Sachs’ expectation. Goldman estimates that about 0.3 percentage points of the shortfall came from increased social insurance contributions, while the remaining approximately 0.6 percentage points reflected its previously overly optimistic assumption about the speed at which cost controls would take effect.
East Buy’s operating margin rose 2 percentage points year over year and fell 1.3 percentage points quarter over quarter, coming in 1.6 percentage points below Goldman Sachs’ expectation. Goldman believes this may be related to increased sales and marketing spending on category-specific Douyin livestreams, Tmall and JD.com marketplace channels, and WeChat Channels.

In the first quarter, revenue from the new education business grew 25% year over year, domestic test preparation grew 22%, and overseas test preparation and consulting grew 8%; the high school business grew 14%, slightly below Goldman Sachs’ expectation. Management raised its fiscal 2027 revenue growth guidance for domestic test preparation and overseas test preparation and consulting from 15% and 3% to 20% and 5%, respectively.
Goldman Sachs estimates that East Buy’s first-quarter revenue grew 90% year over year, and management expects growth to accelerate further in the second quarter. Goldman’s tracking data show that its Douyin gross merchandise value in September was approximately 1.477 billion yuan, up 126% year over year and 31% quarter over quarter; this is channel transaction value, not company revenue.

Goldman Sachs raised its fiscal 2027 through 2029 revenue forecasts for New Oriental by an average of 3%, mainly because of higher revenue assumptions for East Buy. It expects group revenue in US dollar terms to grow 21% in fiscal 2027, above the upper end of the company’s 14% to 18% US dollar revenue growth guidance.
At the same time, Goldman Sachs lowered its forecasts for the group’s non-GAAP operating margin over the next three years by 1 to 1.2 percentage points. It now expects the core education business’s margin to rise just 0.3 percentage points year over year in fiscal 2027, compared with its previous forecast of a 1.4 percentage-point increase; the revision incorporates higher social insurance costs and the progress on cost controls shown in the first quarter.
Under the new forecasts, the group’s non-GAAP operating margin in fiscal 2027 will rise by approximately 0.15 percentage points year over year, and operating profit will be 899 million US dollars, 4% below Goldman Sachs’ previous forecast.

Goldman Sachs maintained its buy rating on New Oriental and lowered its target prices for its American depositary shares and Hong Kong-listed shares from 71 US dollars and 55 Hong Kong dollars to 69 US dollars and 54 Hong Kong dollars, respectively. The bank considers the valuation attractive: after the share price fell 12% following the earnings report, the price-to-earnings ratio based on its fiscal 2027 earnings forecast was 12.4 times, or 3.3 times excluding cash.
Goldman Sachs raised its fiscal 2027 through 2029 revenue forecasts for East Buy by 20% to 21%, reflecting higher transaction value from new Douyin livestream accounts and other e-commerce channels; it also lowered its adjusted net margin assumptions because margin expansion was below expectations.
Although East Buy’s target price was raised from 15 Hong Kong dollars to 17 Hong Kong dollars, Goldman Sachs believes its valuation remains high relative to its growth prospects and peers and therefore maintained its sell rating.