China's Demographic Decline And Regulatory Pressure Will Weaken Prospects

Key Takeaways

• Shrinking demand due to demographic trends, regulatory risks, and overseas market pressures threaten growth and margin stability in core and expanding business lines.
  
• Intensifying competition, rising costs, and consumer shifts toward alternative education formats challenge both digital platform profitability and attempts to diversify revenue streams.
  
• Diversified growth in new business segments, investments in AI, and strong capital discipline position the company for resilient long-term revenue and margin expansion.

Catalysts

New Oriental Education & Technology Group Inc.

• The persistent decline in China's school-age population due to demographic shifts implies that long-term demand for core education services will shrink, pressuring New Oriental's top-line growth in the K-12 business over the coming years and constraining revenue expansion.
  
• Sustained increases in regulatory scrutiny-including potential new rules on data privacy and permissible content in digital learning-risk escalating compliance costs and could restrict the rollout of new offerings, compressing net margins and limiting the profitability of expansion into digital services.
  
• Ongoing macroeconomic and geopolitical tensions are already dampening demand in high-margin overseas test prep and consulting businesses, with management guiding for near-zero or flat growth in these segments next year. This threatens both revenue diversification and future earnings growth.
  
• Despite heavy ongoing investments in AI and digital platforms, fiercer competition from low-cost and free online education alternatives is likely to erode New Oriental's ability to maintain premium pricing, squeezing net margins and undermining earnings resilience as the digital education market matures.
  
• Efforts to pivot into fast-growing categories such as learning devices and non-academic tutoring face margin pressure due to rising costs, aggressive discounting by competitors, and the risk of consumer preference shifting further towards informal and micro-credential education models, which could diminish long-term revenue growth and reduce profitability.

New Oriental Education & Technology Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on New Oriental Education & Technology Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming New Oriental Education & Technology Group's revenue will grow by 11.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.2% today to 9.6% in 3 years time.
• The bearish analysts expect earnings to reach $638.1 million (and earnings per share of $3.8) by about July 2028, up from $391.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, down from 20.9x today. This future PE is lower than the current PE for the US Consumer Services industry at 19.5x.
• Analysts expect the number of shares outstanding to decline by 1.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.58%, as per the Simply Wall St company report.

New Oriental Education & Technology Group Future Earnings Per Share Growth

Risks

• Rapid growth in new business lines, such as non-academic K-9 tutoring, educational devices, and digitalized smart study solutions, has resulted in a revenue increase of 35% year-over-year this quarter, indicating strong potential for future top-line revenue expansion and resilience against core business headwinds.
  
• The company's integrated tourism-related business line, including study tours and culture travel products, achieved an 85% year-over-year revenue increase and is gaining momentum both domestically and internationally, supporting revenue diversification and future earnings growth.
  
• Ongoing and substantial investment in AI and proprietary online/hybrid education platforms is driving improved customer retention, operational efficiency, and cost leverage, which management expects to result in margin expansion and improved net margins over time.
  
• Deferred revenue increased by 15% year-over-year, reflecting strong demand and a healthy pipeline of future service delivery, which bodes well for sustained revenue growth in the coming quarters.
  
• The board's ongoing capital allocation strategy, with significant share buybacks and the possibility of future dividends, underscores strong cash generation and a commitment to returning value to shareholders, which can support share price appreciation even if revenue growth moderates.

Valuation

• The assumed bearish price target for New Oriental Education & Technology Group is $41.17, which represents two standard deviations below the consensus price target of $62.32. This valuation is based on what can be assumed as the expectations of New Oriental Education & Technology Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $77.0, and the most bearish reporting a price target of just $33.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.6 billion, earnings will come to $638.1 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 7.6%.
• Given the current share price of $50.12, the bearish analyst price target of $41.17 is 21.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.