Executive Summary / Key Takeaways

• Strategic Resilience Through Existential Crisis: New Oriental has successfully pivoted from a banned K-9 academic tutoring business to a diversified education technology platform, with non-academic tutoring and intelligent learning devices delivering 20%+ growth and becoming the company's key long-term growth driver.

• Capital Allocation Maturity: The company has evolved from growth-at-all-costs to disciplined shareholder returns, completing a $700 million share repurchase program and committing to a three-year plan allocating no less than 50% of net income to dividends and buybacks, yielding over 5% to shareholders.

• Margin Expansion Despite Transition: Non-GAAP operating margins reached 22% in Q1 2026, up 100 basis points year-over-year, demonstrating that the new business model is not only viable but more profitable than the legacy tutoring business, with intelligent learning devices achieving 22-23% operating margins.

• Diversified Revenue Base Reduces Regulatory Risk: Four distinct segments—educational services, East Buy livestreaming e-commerce, overseas consulting, and tourism—provide multiple growth vectors while mitigating dependence on any single regulatory regime, though overseas consulting faces 4-5% headwinds from geopolitical tensions.

• Critical Execution Variables: The investment thesis hinges on sustaining 20%+ growth in K-9 non-academic tutoring while the tourism business model matures, and managing the East Buy restructuring from a 33% revenue decline to stable, profitable growth.

Setting the Scene: From Existential Threat to Strategic Rebirth

New Oriental Education & Technology Group began in 1993 as a single TOEFL test preparation school in Beijing, building over three decades into China's premier academic tutoring brand. This history is important as it established the trust and recognition that now underpins the company's survival strategy. When China's "Double Reduction Policy" abruptly banned for-profit K-9 academic tutoring in July 2021, New Oriental faced not a gradual market shift but an overnight extinction of its core business. The company had to choose between liquidation or radical reinvention.

The strategic response reveals management's adaptive capacity. By the end of 2021, New Oriental ceased all K-9 academic services and deconsolidated its compulsory-education schools. More importantly, it launched three new business lines simultaneously: non-academic tutoring focused on cultivating "innovative abilities," intelligent learning systems and devices leveraging AI technology, and an integrated tourism business. This wasn't a defensive retreat but an offensive repositioning into higher-margin, less-regulated segments where the company's brand equity and teaching expertise could command premium pricing.

Today, New Oriental operates four distinct segments that share common technology infrastructure but address different market needs. Educational services ($3.46 billion in FY2025 revenue) encompasses test preparation for overseas exams and the new non-academic tutoring initiatives. East Buy ($600 million revenue) runs a livestreaming e-commerce platform for agricultural and private-label products. Overseas study consulting ($516 million) assists students with international applications. The "Others" segment ($327 million) includes educational materials and a tourism business that grew 71% year-over-year in Q4 2025. This diversification transforms New Oriental from a single-policy risk exposure into a multi-platform education and consumer company.

Technology, Products, and Strategic Differentiation: The OMO and AI Foundation

New Oriental's competitive moat rests on its Online-Merge-Offline (OMO) system, launched in 2014 but now central to the new business model. The OMO platform digitalizes educational resources while preserving the teacher-student interaction that Chinese parents value, creating a hybrid model that pure online players cannot replicate. This approach solves the trust deficit that plagues fully digital education platforms in China—parents pay premium prices precisely because New Oriental's brand represents quality assurance and proven outcomes.

The intelligent learning system and device business exemplifies how technology translates to economics. Tested across 60 cities with the top 10 contributing over 50% of revenue, these AI-powered devices deliver a tailored digital learning experience with teacher monitoring and customized materials. The operating margin of 22-23% matches traditional offline classes while offering superior scalability, as technology reduces teacher time per student. As the device business scales, it could drive margin expansion beyond historical tutoring levels, fundamentally improving the company's earnings power.

East Buy's private label strategy demonstrates a different technological application. With 600 SKUs launched by November 2024 and contributing 37% of total GMV, East Buy uses livestreaming not just as a sales channel but as a brand-building platform. The company's end-to-end quality management system and multi-platform presence (Douyin, Taobao, WeChat, proprietary app) create a direct-to-consumer relationship that bypasses traditional retail markups. This approach transforms New Oriental from a service provider into a product company with inventory risk but also higher gross margins—East Buy's gross margin structure, while not disclosed separately, benefits from private label economics that typical e-commerce platforms cannot match.

Financial Performance & Segment Dynamics: Evidence of Model Viability

The financial results validate the strategic pivot. Educational services revenue grew 27.2% in FY2025 to $3.46 billion, with operating income of $808 million—a 23.4% operating margin that exceeds most education peers. This segment's strength comes from two drivers: overseas test prep (growing 15% in Q4 2025) and the new K-9 non-academic tutoring business, which management expects to exceed 20% growth in FY2026. The latter is particularly significant because it replaces the banned academic tutoring with a legally compliant alternative that apparently commands similar pricing power.

East Buy's 33.3% revenue decline to $600 million in FY2025 reflects deliberate restructuring, not business failure. The company is sacrificing short-term revenue for long-term profitability, reducing reliance on third-party products in favor of higher-margin private label goods. This restructuring mirrors the broader strategic shift from growth to returns—management is optimizing for profit dollars rather than GMV, a mature approach that should yield higher-quality earnings once the transition completes.

Overseas consulting grew 17.4% to $516 million in FY2025, but management guides to a 4-5% decline in FY2026 due to "international relationship change" and macroeconomic uncertainty. This headwind is partially offset by rapid growth in non-U.S./U.K. destinations (particularly Asia) and "background improving" services, but the segment's margin pressure illustrates the limits of diversification—geopolitical risk cannot be fully engineered away.

The tourism business, while small, demonstrates New Oriental's ability to leverage its brand into adjacent categories. Growing 71% year-over-year in Q4 2025 and 233% in Q2, this segment serves K-12 study tours and premium middle-aged/senior travelers across 30 provinces. The 71% growth rate is unsustainable—management explicitly states it will "slow down" in FY2026 as the business model matures—but the rapid uptake proves the brand's elasticity. This expansion shows New Oriental can create new revenue streams from scratch, reducing the risk that the company is a one-trick pony dependent solely on education policy.

Consolidated margins tell the transformation story. Non-GAAP operating margin of 22% in Q1 2026, up 100 basis points, results from cost control initiatives that management estimates will contribute 100-150 basis points of improvement for the full year. This expansion occurs while the company invests in new business lines, suggesting the core operations have achieved scale efficiency. The $60.3 million goodwill impairment on the kindergarten business in Q4 2025 is a one-time cleanup that removes legacy baggage, making the margin improvement more credible.

Outlook, Guidance, and Execution Risk

Management's FY2026 guidance—5-10% total revenue growth—appears conservative but reflects strategic prudence. The Q1 2026 guidance of 2-5% growth is artificially depressed by three factors: a high base from prior-year Q1 before East Buy's restructuring, the earlier Chinese New Year timing that boosted Q4 2025 revenue at Q1 2026's expense, and the company's deliberate shift from revenue maximization to profitability. This guidance signals that management is optimizing for sustainable, high-quality growth rather than meeting arbitrary growth targets.

The segment-level outlook reveals where management sees real opportunity. K-9 non-academic tutoring is projected to grow over 20% in FY2026, with the high school business delivering double-digit growth. Stephen Yang explicitly states that K-9 "will be the key growth driver for the whole group in the longer term." This conviction is backed by data: non-academic tutoring has rolled out to 60 cities with steady penetration, particularly in high-tier cities where the top 10 contribute over 60% of revenue. The intelligent learning device business shows improved customer retention and scalability, with the top 10 cities contributing around 50% of revenue. These concentration metrics indicate the business can achieve profitability in tier-1 cities before scaling to lower-tier markets, reducing the risk of unprofitable expansion.

Conversely, overseas consulting is expected to decline 4-5% as macroeconomic uncertainty and geopolitical tensions dampen demand for U.S./U.K. study destinations. Management acknowledges the business is "adversely affected by the external environment" but notes that non-traditional destinations and background improvement services are growing fast. This bifurcation shows New Oriental can pivot within segments, not just across them—a crucial capability in volatile regulatory environments.

The tourism business faces a deliberate slowdown as management takes "more time to build and fix its business model." This honesty suggests the 71% growth was experimental; the company is now professionalizing operations before scaling further. Sisi Zhao's conservative 15-20% growth estimate for FY2026 implies the segment can still contribute meaningfully without consuming excessive management attention.

Capital allocation plans demonstrate remarkable confidence. The three-year shareholder return plan, effective FY2026, commits no less than 50% of prior-year net income to dividends and buybacks. With FY2025 net income of $372 million and a $300 million new buyback authorization, the implied payout ratio exceeds 130% of last year's earnings. This commitment shows management believes the business generates more cash than it can profitably reinvest—a hallmark of a mature, self-sustaining company. The 5%+ shareholder yield, combining dividends and buybacks, provides a valuation floor that growth-stage education companies cannot offer.

Risks and Asymmetries: What Can Break the Thesis

Regulatory risk remains the paramount concern. The "Double Reduction Policy" proved that a single government document can eliminate an entire business line overnight. While New Oriental has pivoted to compliant non-academic tutoring, the regulatory boundary is fluid. Management states they are "in close collaboration with government authorities" and "adjusting our business operation as required," but this dependence on regulatory forbearance is a permanent risk. The $60.3 million kindergarten goodwill impairment is a reminder that even "compliant" businesses can become obsolete if policy shifts.

Macroeconomic exposure threatens the overseas consulting segment's profitability. Management's guidance for a 4-5% revenue decline in FY2026 assumes that international tensions and economic uncertainty will persist. If U.S.-China relations deteriorate further or if Western universities restrict Chinese student admissions, the decline could exceed guidance. Overseas consulting contributed $82.5 million in operating income in FY2025—material to overall profitability. While the company is diversifying to Asian destinations, these markets are smaller and less profitable than traditional U.S./U.K. consulting.

Execution risk in the tourism business could consume capital without delivering returns. The segment's 71% growth rate is impressive, but management admits the model needs "more time to build and fix." If the tourism business cannot achieve the 22% operating margins seen in education services, it will dilute overall returns. The concentration of revenue in top cities suggests the model may not scale nationally, limiting its ultimate size.

Competitive pressure in learning hardware is intensifying. Management acknowledged that competitors are launching "cheaper and cheaper" devices, threatening the intelligent learning system's premium pricing. New Oriental's defense—leveraging its educational brand and interactive teaching system to create "stickiness"—may not withstand sustained price competition from well-funded tech giants. If margins compress from 22-23% to the mid-teens, the K-9 growth story loses much of its financial appeal.

The East Buy restructuring presents a different risk: that livestreaming e-commerce proves a distraction from the core education mission. While private label products now contribute 37% of GMV, the segment's operating income collapsed from $132 million in FY2023 to $10 million in FY2025. If the turnaround fails, management may need to divest or shutter East Buy, taking a significant write-down and admitting strategic error.

Competitive Context and Positioning: Relative Strengths and Weaknesses

Against TAL Education Group (TAL), New Oriental's diversified model shows both strength and vulnerability. TAL's 50.98% FY2025 revenue growth far exceeds New Oriental's 30.5% Q1 growth, reflecting TAL's sharper focus on domestic non-academic tutoring. However, New Oriental's 20.4% operating margin and 7.36% net margin significantly exceed TAL's 11.2% and 6.45%, respectively. New Oriental's brand premium and overseas consulting business generate higher profitability per dollar of revenue. TAL's faster growth comes at the cost of lower margins and higher regulatory exposure to domestic policy shifts.

Gaotu Techedu (GOTU) represents the pure-play online threat. With 30.7% Q3 2025 revenue growth, Gaotu matches New Oriental's pace but operates at a -6.41% net margin and -11.27% operating margin. New Oriental's physical network and brand trust command pricing power that pure online players cannot replicate. However, Gaotu's lower cost structure allows aggressive price competition in learning hardware, pressuring New Oriental's 22-23% device margins. The key asymmetry is that New Oriental can sustain losses longer due to its $4.7 billion cash position versus Gaotu's smaller scale, but Gaotu can undercut on price indefinitely if funded by venture capital.

Stride, Inc. (LRN) offers an international comparison but limited direct competition. LRN's 12.76% net margin and 23.04% ROE exceed New Oriental's, but its 5.38% operating margin reflects a different cost structure. Stride's U.S. focus avoids Chinese regulatory risk entirely, but its growth rate is materially slower. New Oriental's advantage lies in its China-specific content and regulatory navigation expertise—an intangible asset that Stride cannot replicate.

New Oriental's moats are threefold. First, its 30-year brand built on academic excellence creates trust that new entrants cannot buy. Second, the OMO platform's hybrid model combines online scalability with offline quality control, a balance that pure digital or pure physical players struggle to achieve. Third, the company's regulatory compliance expertise, honed through the "Double Reduction" crisis, provides a barrier to entry that protects its non-academic tutoring business from new competitors. These advantages suggest New Oriental can maintain premium pricing and 20%+ margins even as competition intensifies.

Valuation Context: Pricing a Transformed Business

At $51.05 per share, New Oriental trades at an enterprise value of $4.65 billion, or 0.93x trailing revenue of $4.90 billion. This multiple is modest for an education technology company, particularly one growing core segments at 20-30%. The P/E ratio of 22.25x is well below TAL's 39.6x, suggesting the market applies a discount for New Oriental's regulatory history and diversified (some might say unfocused) business model.

The more compelling valuation metrics are cash flow-based. Price-to-operating cash flow of 9.40x and price-to-free cash flow of 13.17x are attractive for a company with 20%+ operating margins and a 5%+ shareholder yield. The dividend yield of 2.27% is new to the sector and provides income that growth-focused peers like TAL and Gaotu cannot match. This yield expands New Oriental's investor base beyond growth-only funds to income-oriented shareholders, potentially reducing volatility.

Balance sheet strength is a key differentiator. With $4.7 billion in cash and short-term investments, debt-to-equity of just 0.18, and a current ratio of 1.65, New Oriental could weather another regulatory storm or acquisition opportunity that would bankrupt less-capitalized competitors. The company's $300 million new buyback authorization, combined with the 50% net income payout policy, implies a shareholder yield exceeding 5% at current prices. This yield is supported by $896.6 million in annual operating cash flow and $637.4 million in free cash flow, providing a 13.7% free cash flow yield that comfortably funds the capital return program.

Relative to peers, New Oriental's valuation appears conservative. TAL trades at 1.46x EV/revenue despite lower margins and higher regulatory risk. Gaotu's 0.38x EV/revenue reflects its unprofitable status and smaller scale. Stride's 1.12x EV/revenue and 9.55x P/E are comparable but reflect slower growth. New Oriental's discount likely stems from the East Buy restructuring overhang and investor skepticism about the tourism business model. If management executes on its 20% K-9 growth target and stabilizes East Buy margins, the valuation gap should close.

Conclusion: A Mature Growth Company at an Inflection Point

New Oriental has achieved what few education companies have: a successful business model transformation under existential pressure. The company's pivot from banned K-9 academic tutoring to high-margin non-academic services, intelligent learning devices, and diversified consumer businesses demonstrates strategic agility that the market has not fully recognized. The financial evidence is compelling—22% operating margins, $4.7 billion in cash, and a 5%+ shareholder yield—yet the stock trades at a discount to less-profitable peers.

The central thesis hinges on two variables. First, can New Oriental sustain 20%+ growth in K-9 non-academic tutoring while maintaining 22-23% margins as competition intensifies? The early data is promising: 60-city rollout, 60% revenue concentration in top cities, and improving retention suggest a scalable, profitable model. Second, will the tourism business mature into a stable contributor or prove a costly distraction? Management's deliberate slowdown and conservative 15-20% growth guidance suggest a thoughtful approach, but execution risk remains.

The capital allocation transformation is the most underappreciated element. The shift from empire-building to returning 50% of net income demonstrates management's confidence that the new business model is self-sustaining and that growth opportunities no longer require hoarding cash. This maturity warrants a valuation re-rating from a "regulatory-risk Chinese education stock" to a "diversified consumer/technology company with disciplined capital returns."

For investors, the risk/reward is asymmetric. Downside is limited by the 5%+ shareholder yield and $4.7 billion cash cushion. Upside depends on execution of the K-9 growth story and East Buy margin recovery. If management delivers on its FY2026 guidance, the current 0.93x EV/revenue multiple should expand toward TAL's 1.46x, implying 50%+ upside. More importantly, the business has achieved durable profitability and diversification that make it resilient to the regulatory shocks that once threatened its existence.