EDU: Resilient Growth, Brand Equity of the Sector Leader Still Rising

$New Oriental EDU & Tech(EDU.US) Before the U.S. market open on Jan 28 Beijing time, the company reported FY2026 Q2 results, covering the autumn term from Sep–Nov 2025.The print beat expectations, with the delta vs. the Street mainly from the cautiously guided study-abroad biz. Management nudged up full-year revenue guidance, signaling confidence in a recovery in study-abroad and sustained high growth in new initiatives.

We start with results and keep the focus on education operations. Key points below.

1) Full-year guide raised: Next-quarter revenue guide is inline with market expectations, while FY26 revenue is lifted to $5.3–5.5bn, implying +8%–12% (vs. prior +5%–10%).

2) Study-abroad: Test-prep rose 4% while consulting was not disclosed but likely weaker, implying flat YoY overall. Even so, this is well ahead of the market’s low-single-digit decline expectation.

3) New initiatives: Grew 21%, rebounding as guided and confirming seasonal effects called out last quarter. Smaller peers tend to focus on peak holiday seasons, so competition eases in Q2 (autumn term), benefiting New Oriental.That said, enrollment growth continued to decelerate, implying it is unlikely to sustain the current pace next quarter. Learning devices also saw a slight slowdown.

4) Adult tests and high-school tutoring: Up 13%, inline and steady.

5) Tight cost control: Since 4Q25FY (calendar Q2 2025), the group has executed a year-long cost-efficiency program. It continued this quarter.Sales expenses were the main area of pullback, and OPM improved by nearly 4ppt YoY.

6) Dividends and buybacks: The company paid the scheduled dividend and repurchased $86mn of stock this quarter. Under the previously announced $490mn shareholder-return program, the implied yield vs. ~$9.0bn mkt cap is 5.4%, offering support during valuation resets.

7) Key financial metrics at a glance:

Dolphin Research View

Most near-term positives were largely pre-announced last quarter and are now being delivered in line. The biggest upside surprise would come if geopolitical volatility stabilizes faster than feared, easing concerns on study-abroad growth (study-abroad contributes about one-fifth of revenue).A secondary driver would be non-academic education maintaining high growth through competitiveness.

In the past two quarters, performance helped ease caution on study-abroad, and the beat looks driven more by market-share gains than by macro tailwinds. Geopolitical noise in North America temporarily redirected demand to the UK and Australia, but given the higher concentration of top schools in North America, a decline in intent caused by geopolitics and sentiment is hard to fully offset elsewhere.In short, the gap in North America is unlikely to be fully filled by UK/Australia.

In the near term, student visa approvals in the U.S. and Canada showed marginal improvement in Q3 last year vs. the trough in Apr–May. Management previously indicated the study-abroad segment would not drag group profits in FY27 (calendar 2026), helped not only by stabilizing revenue but also by strict cost control within that segment.This should cushion profitability.

New initiatives and adult English remain on relatively high growth. Near term, New Oriental can still benefit from share gains, but medium-to-long term it needs to address AI disruption and demographic headwinds from a shrinking youth population.AI-native education platforms like Doubao Study, leveraging traffic and novel interactions, are carving out share. And since the 2020 birth slump, the impact will become increasingly visible as that cohort reaches school age.

On the revenue side, with the company guiding roughly 10% steady growth, potential risks may be absorbed through the ongoing group-wide cost-efficiency cycle so that mid-term EPS can still grow >10%.This underpins profit growth resilience.

As of Jan 27 ET, New Oriental’s mkt cap was $8.9bn (slightly below last quarter’s print). Based on the updated guide and our modest upward tweak, FY26E P/E is just under 15x, roughly aligned with the expected 3-yr EPS CAGR.But current valuation lacks a leader premium and does not reflect the extra benefit from the near-term efficiency cycle. Under a 'neutral-to-positive' case, we assign PEG=1.1x, implying $9.8bn fair value — about 10% upside vs. yesterday’s close (11% higher vs. last quarter’s valuation). A 5%–6% shareholder return should also provide support if the stock sees an overdone pullback.

Detailed Takeaways

1. Guide raised against headwinds, validating core competitiveness

We first look at revenue for the education core, especially the study-abroad track (test-prep and consulting) under short-term pressure. From Sep–Nov 2025, New Oriental delivered total revenue of $1.19bn, up 15% YoY, above the top end of guidance and slightly ahead of the Street.Management guided next quarter inline and nudged up FY2026 revenue, which aligns with top-down expectations and eases fears that study-abroad would worsen under a volatile environment.

By segment, some data were disclosed on the call and some in small-group meetings. Dolphin Research provides an initial split estimate below and will update exact figures in the comments section later:1) Study-abroad test-prep and consulting grew 4% and -3% in Q1, respectively, implying flattish overall YoY and slightly better than the Street’s -5% YoY. We believe the key driver was share gains rather than a supportive macro backdrop.

The chart shows visa issuance dropped meaningfully YTD, with North America down the most. However, the overall decline of 23% in Jan–Oct is modestly better than 2Q25, suggesting 3Q25 did not further deteriorate and even improved marginally QoQ.This indicates stabilization at the margin.

At a Dec investor meeting, management expected FY2026 U.S.-related study-abroad revenue to fall ~10% YoY. North America and the UK together account for ~60% of study-abroad consulting revenue, or ~24% of total overseas revenue (60%*40%).Thus the Street modeled low single-digit declines for 2Q26FY and FY2026 overseas study-abroad revenue, but actual results came in slightly better.

2) Adult English: +13% vs. +14% last quarter, a modest decel but broadly stable. Watch for AI impact on this segment going forward.

3) New initiatives: Growth rebounded to 21%, inline with expectations. Last quarter’s sudden slowdown, as noted by Dolphin Research, reflected seasonal openings by smaller operators focusing on holidays for cost reasons; a rebound this quarter was expected.

4) High-school subjects: Estimated +13%, a natural slowdown. AI’s encroachment here also bears watching.

Dolphin Research’s mix estimates by segment are shown below:

2. Still in a cost-down, efficiency-up cycle

The group continues its cost-efficiency program (from 4Q25FY through 4Q26FY) targeting $100mn total savings, aiming to preserve profitability amid revenue pressure. This quarter, site optimization lifted GPM by ~1ppt YoY and trimmed sales ratio by ~2ppt.As a result, OPM improved by nearly 4ppt YoY; ex-SBC, non-GAAP OPM also rose by 4ppt+.