New Oriental Alert:Expansion accelerating.Maintain Buy and raise TP to USD105

Accelerated expansion due to strong demand. We expect faster EPS growth

    1QFY18revenue reported USD661mn, up 23.8% YoY, implying 4%/3% beat onDBe/consensus. Due to the large scale of summer promotion and fast capacityexpansion, non-GAAP operating margin fell by 4ppts YoY to 25%. Non-GAAPEPS of USD1.02was in line with DBe/consensus. K-12enrollment growthrecorded 22% YoY, with U-Can and POP Kids enrollment delivering 22% and23% YoY growth. For 2Q, management guided accelerating revenue growth of31-35% YoY (+29-33% excluding FX impact), mid-point of growth rate 8pptsahead of DBe. Full-year revenue guidance is ~30% YoY, 6% above consensus.Management maintains its long-term non-GAAP operating margin target of 17-18% unchanged. We like the robust expansion and raise our EPS by 1%-2% forFY19-20E after taking into account revenue increases and margin cuts.

    Details of summer promotion and capacity expansion

    Summer promotion attracted 554k enrollment in 38cities. The retention rate is~50%, leading to 270k+ additional enrollment in 2Q and ahead. We believe 2Qrevenue growth to deliver ~33% YoY growth. For FY18, management raised itscapacity expansion plan to 30% YoY (20% from new learning center openingand 10% from adding classroom areas to existing learning centers).

    Results conference call takeaways

    n U-Can/POP Kids continued to deliver strong revenue momentum, growing35%/36% YoY in USD. Overseas test prep and consulting business/VIPclass reported 16%/32% YoY growth in USD.

    n EDU added 43learning centers in 22cities, implying 31% YoY capacityexpansion in 1Q. For FY18, management revised up its expansion plan toadd 30% in capacity.

    n The company rolled out a dual teacher model in 1new city Zhongshan in1Q and plans to expand in 5-10new cities for FY18.

    n The blended ASP increased by 8% in USD and hourly ASP increased by4% YoY in RMB, with U-Can/POP Kids/overseas test prep up by1%/3%/10%, respectively.

    Maintaining Buy rating and raise target price to USD105

    We revise up FY18-20E revenue by 6% each year and slightly increase non-GAAP net income forecasts by 1-2%. We maintain our Buy rating with a newtarget price of USD105. Our target price is based on 1.1x PEG against aCY18E-20E EPS CAGR of 32% and USD3.0non-GAAP EPS in CY18E.Downside risks: 1) slower enrolment growth; and 2) unfavorable regulatorypolicy.