New Oriental Alert:dbAccess Asia Conference 2017Highlights

Utilization rate drives margin improvement.

    EDU expects non GAAP operating margin to reach 18-19% in the next two tothree years, mainly driven by the increase in utilization rate which is onaverage 200bps up each year. According to management, 100bps increase inutilization rate will translate into 60-70bps improvement of operating margin.

    For operating margin by segments, overseas test prep has the highest marginof 30%, followed by U-Can of 25% and Pop Kids of 15-20%. Due to the lowmargin, company will keep VIP class (1-5 students per class) under 30% ofrevenue, vs. 45% revenue from small class (6-14 students per class).

    Benefits from existing scale.

    EDU plans to expand capacity by ~10% in FY17 by opening 70-80 newlearning centers, and targets for 10-12% capacity increase for FY18. Thediscipline for EDU to open new learning centers in certain cities will be solidtopline growth and healthy margin improvement for existing learning centers.

    For cities like Beijing, Hangzhou and Suzhou, company expects to open newcenters, seeing the strong momentum in these cities. Management reiteratedthe learning centers to have compliant licenses or certificates son not likely tosuffer from licensing problems during expansion.

    Expect positive feedback from summer promotion and dual teacher class.

    This year EDU expect higher enrollment compared to 200k enrollment lastsummer, and better retention rate vs. average 40% last year. For dual teacherclass, the retention rate is ~50% and keeps improving when more citiesintroduce the initiative. For ASP, company expects to see 5-10% increase forblended ASP in FY18.

    Usage of cash: unlikely to have regular dividend policy.

    EDU is less likely to implement regular dividend policy due to the tax concern.

    Company prefers to offer share buyback and special dividend instead, to givegood return to investors.