2QFY26 results beat; strong core educational business and solid margin expansion

2QFY26 results beat; strong core educationalbusiness and solid margin expansion Target PriceUS$78.00(Previous TPUS$76.00)Up/Downside32.3%Current PriceUS$58.95 New Orientalannounced 2QFY26 results: net revenue increased by 15% YoYtoUS$1.19bn,3%ahead of Bloomberg consensus estimate;non-GAAPoperatingincomesurgedby207% YoY to US$89.13mn, beating consensusestimateof US$54.87mn,primarily attributable to enhanced operationalefficiencyand improved utilization within the educational business. Lookingahead,management expected net revenue to grow by 11-14%YoY toUS$1.31bn-1.35bn in 3QFY26E, and also raisedFY26E net revenue forecastto US$5.29-5.49bn (+8%-12% YoY, vs. previously +5-10% YoY), given the solidmomentum of new educational businessand high-school tutoring business.Weraise ourFY26-28E total revenueforecastby 0-1% in view of the solid K-12business,and lift our SOTP-derived target price to US$78.0(previous:US$76.0). Maintain BUY on strong core educational business, solid marginexpansion trend andattractiveshareholder return. China Internet Saiyi HE, CFA(852) 3916 1739hesaiyi@cmbi.com.hk Wentao LU, CFAluwentao@cmbi.com.hk Ye TAO, CFA(852) 3850 5226franktao@cmbi.com.hk Acceleratingrevenue growth on strong core educational businesses.New educational business initiatives revenue grew by 21.6%YoY in2QFY26, primarily driven by the solid growth ofactive paid users ofintelligent learning system(+35% YoY) and non-academic tutoring courseenrolment(+6%YoY).Revenue from overseas test prep businessincreased by 4% YoY in2QFY26, despite the macro uncertainty. Domestictest prep revenue was up by 12.8% YoY in 2QFY26. Revenue from EastBuy recovered by 6% YoY in 1HFY26, mainly thanks to the expansion ofproduct categories and enhancement of supply chains. Stock Data Expectsolid business momentum to continue in 3QFY26E.For3QFY26E,managementremainedupbeat on the K-12 businesses, primarilythanksto the enhanced product quality,which has boosted both theretention rate and customer lifetime value. Overseas-related businessmaycontinue to face macro headwinds, butmanagementexpectedits revenueto belargelyflattish YoY in 2HFY26E due to better execution. We forecastneweducational initiatives/high-school tutoring/domestic test prep foradults/overseas-related business to growrevenueby 23%/18%/15%/2%YoY in 3QFY26E. Enhancedmargin profile andattractiveshareholderreturn.Non-GAAPOPM expanded by 5ppt YoY to 7.5% in 2QFY26, mainly due totheenhancedoperationalefficiencyand improved utilization rate ofeducationalbusiness. GPM improved by 1ppt YoY and S&M expense ratio declined by3ppt YoY in 2QFY26. Looking ahead,managementexpectedfurther marginexpansion in 2HFY26E, supported by improved operationalefficiencyofboth core educational business and East Buy. We forecast non-GAAP OPMto expand by 1ppt YoY to 13.1% in 3QFY26E. In term of shareholder return,the company hasrepurchased 1.6mn ADSsfor US$86.3mn overthepastthree months, equivalent to 1% of the current market cap. Source: FactSet Business forecasts update and valuation Valuation 1) US$75.0for the educational and consulting business (96% of total valuation), based on25x FY26E PE, which ison par with the educationalsector average. 2) US$1.8for East Buy (2% of total valuation), based on12x FY26E PE, which ison parwiththee-commercesector average. 3) US$1.2for the Tourism and others business (2% of total valuation), based on10x FY26EPE,which is a discount to other OTA platforms (14x) given that its tourism businessremains at early development stage. Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the content of this research report, in whole or in part, certifies thatwith respect to thesecurities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission)(1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issueof this report; (3) serve as an officer of any of the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies coveredin this report. CMBIGM RatingsBUY : Stock with potentialreturn of over 15% over next 12 monthsHOLD: Stock with potential return of +15% to-10% over next 12 monthsSELL: Stock with potential loss of over 10% over next 12 monthsNOT RATED: Stock is not rated byCMBIGM :Industry expected to outperform the relevant broad market ben