REINSTATINGWITHBUYAND$24TARGETPRICE1016

1、36 32 28 24 20 3m d deutsche bank markets research rating buy asia china company new oriental date 15 october 2012 forecast change consumer education services reutersbloombergexchange ticker price at 12 oct 2012 (usd) price target - 12mth (usd) 52-week range (usd) 17.14 24.00 30.20 - 9.50 edu.nedu u

2、snysedu hang seng index21,148 sec gives the all clear; reinstating with buy and $24 target price true gold does not fear the fire after a formal three-month sec investigation, edu has come through unscathed. this follows an independent committees formal refutation of the short seller report several

3、weeks ago. at a near historically-low valuation of 14x forward per, based on more conservative estimates, we see a clear entry point for the stock after the share price correction, given the intact long-term sector prospects and edus undoubted leadership in the space. we reinstate with a buy and us$

4、24 target price as our top pick in the china education sector. catalyst: sec investigation concluded in favor of edu vivian hao research analyst (+852) 2203 6241 paul ginocchio, cfa research analyst (+1) 415 617-4207 key changes edu received notice from the sec on 11 october that it has no objection

5、 to the consolidation of vie into the on-shore wofe subsidiaries or to the companys organizational structure. edu also filed its fy12 20-f on 12 october with no restatements to past financials. we believe a major overhang has rating target price price/price relative na na buy us$24 therefore been re

6、moved. in our view, market sentiment on the sector and china adrs with concerns regarding vie structures will improve. long-term fundamentals intact despite edu guiding conservatively on the forthcoming fy1q13 figures (due to report on 29 october), the biggest quarter (70% of full-year earnings), we

7、 believe the long-term prospects for chinas private education market remain attractive. in our view, edu, as the leading player with an established brand nationwide, remains a compelling secular growth story for long-term investors. 16 12 8 10/104/11 new oriental 10/114/12 new target price at us$24

8、(41% upside potential); reinstating with a buy based on more conservative margin assumptions (we assume gaap net hang seng index (rebased) performance (%) 1m 12m margin will be flattish at 1516%), the stock is still trading at a per of 14x (10 x ex-cash) cy13e post a 14-15% cut in net income for fy1

9、3/14e. we derive our absolute hang seng index 18.2 5.3 -24.4 11.1 -43.5 15.3 new target price of us$24 by applying a 20 x per against cy13e gaap eps of us$1.20, and a peg of 0.8x (low end of its historical trading range of 0.81.0) with a moderated earnings cagr of 26% (previously 33%). with the sec

10、investigation concluded, we see a clear entry point at this level. reinstating rating at buy. key risks: 1) macro softness; 2) intensifying competition. forecasts and ratios year end may 31 sales (usd) reported npat (usd) reported eps fd (usd) old db eps fd (usd) % change db eps growth (%) per (x) y

11、ield (net) (%) 2011a 557.9 101.8 0.65 0.65 0.0% 29.8 39.3 0.0 2012a 771.7 132.7 0.85 0.89 -4.9% 29.7 31.9 0.0 2013e 1,002.4 154.1 0.98 1.15 -14.5% 16.2 17.4 2.0 2014e 1,313.5 210.4 1.34 1.59 -15.5% 36.5 12.8 2.7 source: deutsche bank estimates, company data b eps is fully diluted and excludes non-re

12、curring items _ deutsche bank ag/hong kong all prices are those current at the end of the previous trading session unless otherwise indicated. prices are sourced from local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subject companies. deutsche bank doe

13、s and seeks to do business with companies covered in its research reports. thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision

14、. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012. 12 15 october 2012 education services new oriental model updated:15 october 2012 fiscal year end 31-may 20092010201120122013e2014e running the numbersfinancial summary asia china education services new oriental

15、db eps (usd) reported eps (usd) dps (usd) bvps (usd) weighted average shares (m) average market cap (usdm) 0.40 0.40 0.00 2.3 149 2,131 0.50 0.50 0.00 2.8 151 2,872 0.65 0.65 0.00 3.7 153 3,931 0.85 0.85 0.00 4.4 155 4,178 0.98 0.98 0.34 5.1 155 2,626 1.34 1.34 0.46 6.0 155 2,626 reuters: edu.nbloom

16、berg: edu us enterprise value (usdm)1,8162,4523,3143,3721,7111,513 valuation metrics buy p/e (db) (x) p/e (reported) (x) 36.0 36.0 37.9 37.9 39.3 39.3 31.9 31.9 17.4 17.4 12.8 12.8 price (12 oct 12) target price 52 week range market cap (m) usd 17.14 usd 24.00 usd 9.50 - 30.20 eurm 2,025 usdm 2,626

17、p/bv (x) fcf yield (%) dividend yield (%) ev/sales (x) ev/ebitda (x) ev/ebit (x) 5.99 3.8 0.0 6.2 25.4 29.8 8.33 4.3 0.0 6.3 27.3 31.7 7.83 4.3 0.0 5.9 29.4 34.7 5.97 4.3 0.0 4.4 23.4 28.9 3.33 5.8 2.0 1.7 10.2 11.9 2.84 10.2 2.7 1.2 6.6 7.5 company profile income statement (usdm) new oriental educa

18、tion independent investigation completed with no findings agaist edu refutal on short seller 15 10 short seller report 5 0 source: company data; bloomberg; deutsche bank. on 11 october 2012, edu was informed by the sec that there were no objections based on further disclosures submitted to the sec i

19、n response to the investigation. edu announced this after market-close on friday. edu has just filed its 20-f, and we note the following key findings: no restatement of historical financials is required or planned service fees up-streamed to wofe from the vie (service fees that the five onshore wofe

20、s received from new oriental china and schools and subsidiaries) under all the service agreements was us$59.4m, us$65.7m and us$118.6m, respectively, from fy1012, which is 76%, 64% and 89% of fy1012 reported consolidated group net earnings, which falls in the normal range for edu historically of 478

21、1% (as suggested by edu). this calculation is based on a) up-streaming of service fees is on a rolling basis which can take many years, b) deferred revenues and part of cash in-flow collected in schools needs to stay with the local entities for daily operations or requires further cash flow to be up

22、-streamed. the sec has no objection to this consolidation. deutsche bank ag/hong kongpage 3 3) 4) 5) 15 october 2012 education services new oriental details of service agreements disclosed. there are four types: 23 new enrollment system development service agreements; 95 other operating service agre

23、ements; 142 sale of educational software and other trademark license agreements. this disclosure alleviates some concerns in the market regarding whether these agreements had been arranged appropriately. further disclosure of franchisee operation under pop kids brand added. in 2010, 2011 and 2012, e

24、du recognized revenues in an aggregate amount of us$35,000, us$249,000 and us$811,000, which is nominal in the context of group revenue. optimized organizational structure: new oriental china (vie) is now solely owned by michael yu instead of 10 shareholders previously. the transaction was completed

25、 in early 2012 before the sec investigation. this amendment has simplified and strengthened the vie structure, which was complex when it was established back in 2006. figure 2: organization structure by fy2011 source: deutsche bank page 4deutsche bank ag/hong kong 6) 7) 15 october 2012 education ser

26、vices new oriental figure 3: current organization structure by fy12 source: deutsche bank power of attorney clause added. on 23 april, century friendship (wholly- owned by michael yu), executed revocable powers of attorney to the five wofes, whereby the five wofes are entrusted as proxies to exercis

27、e rights as the shareholders of the vie. this practice is employed by other companies within the education industry and is viewed as better for minorities. taxation. due to new circulars issued by the chinese government (within the last 6-12 months), edus subsidiaries, which were previously subject

28、to business tax, have since become subject to vat as well. while the company notes that this has not had a material impact on the tax positions of its entities, the applicable rates are increasing. edu has 22 schools classified as not-for-profit, 24 for profit and the remainder are unclassified. not

29、-for-profit schools, including the bj school which contributes 30% earnings to group, are tax exempt. tax treatment for profit schools varies across cities. edu also indicated that among its top four revenue-generating schools, three are subject to the standard 25% tax rate and one is exempt. additi

30、onally, two of edus operating subsidiaries will see tax deutsche bank ag/hong kongpage 5 15 october 2012 education services new oriental rates increasing from 0% to 12.5% over the next few years. we believe we have captured these taxes in our current estimates. all relevant tax certificates have bee

31、n reviewed and approved by sec through deloitte. based on the above, we believe investors major concerns regarding the sec investigation have been properly addressed and resolved, despite the fact that the newly filed 20-f is still under review as part of the normal process. short seller allegations

32、 already refuted subsequent to the allegations raised by a short seller on 18 july 2012, edu established a special committee on 20 july 2012 to conduct an independent review. the special committee consisted of three independent board directors and was assisted by simpson thacher we assume more conse

33、rvative margins to recap, during the fy4q12 results briefing, edu gave conservative guidance on the top line with a range of 26%31% yoy, quoting difficult comps and macro headwinds against its high-end product offerings. nonetheless, deferred revenue at 31 may was up 38% yoy, which is a key positive

34、 leading indicator for its operations. also, based on our checks, we believe edus enrollments for the quarter are on track. figure 5: quarterly earnings forecasts year to 31 m aydb estim ates u s$ m illions n et revenue % yoy growth cost of revenues % of net revenue gross profit % gross margin 1q12

35、272 41.4% -93 34.1% 179 65.9% 2q12 132 38.0% -61 46.3% 71 53.7% 3q12 174 31.7% -72 41.2% 103 58.8% 4q12 193 40.7% -78 40.4% 115 59.6% fy12 772 38.3% -304 39.4% 468 60.6% 1q13e 346 27.3% -114 33.0% 232 67.0% 2q13e 185 40.2% -83 45.0% 102 55.0% 3q13e 224 28.4% -94 42.0% 130 58.0% 4q13e 247 27.9% -97 3

36、9.1% 151 60.9% fy13e 1,002 29.9% -388 38.7% 614 61.3% fy14e 1,314 31.0% -495 37.7% 819 62.3% opex g reinstating with buy our previous valuation for edu (prior to the sec investigations) was based on a 26x cy13e giving a pe-derived target price of us$36.5 per share. we calculated our target pe using

37、a three-year eps cagr of 33% and 0.8x peg based on the consumer staple nature of the industry. given the more competitive industry environment and edus relative weakness in the k-12 tutoring segment (37% of revenues), we have reassessed the company valuation, and thus derive our new target price of

38、us$24 (-34% vs. previous target) on a more cautious note with our cy12-14e earnings cagr forecast lowered to 27% and target peg constant. based on more conservative margin assumptions (we now assume gaap net margin will be flattish within a 1516% range), the stock is still trading at a per of 14x (1

39、0 x ex- cash) cy13e post a 14-15% cut in net income for fy13/14e. we derive our new target price of us$24 by applying a 20 x per against cy13e gaap eps of us$1.20, and a peg of 0.8x (low end of its historical trading range of 0.81.0) with a moderated earnings cagr of 26% (previously 33%). with the s

40、ec investigation concluded, we believe a clear entry point for edu has emerged, given our positive view on the long-term potential for chinas private education sector and edus brand power. we note that the deutsche bank ag/hong kongpage 9 x 15 october 2012 education services new oriental stocks thre

41、e-year historical average forward per is 30 x. we reinstate coverage on edu with a buy rating and as our top pick among education names in china. figure 7: edu three-year historical trading forward pe 45 40 35 30 25 20 15 10 5 3-year avg. peforward pe oct-09apr-10oct-10apr-11oct-11apr-12oct-12 sourc

42、e: bloomberg; deutsche bank page 10deutsche bank ag/hong kong 15 october 2012 education services new oriental figure 8: three-year pe band chart us$pri ce cl ose per 25 per 10 per 30 per 15 per 35 per 20 40.00 35.00 35x 30 x 30.00 25x 25.00 20 x 20.00 15x 15.00 10.00 5.00 10 x oct-09apr-10oct-10apr-

43、11oct-11apr-12oct-12 ye m ay rev. growth (yoy) ebit margin ni growth (yoy) roe fy10 32.0% 20.0% 27.5% 20.0% fy11 44.4% 17.1% 30.8% 20.3% fy12 38.3% 15.1% 30.4% 21.0% source: deutsche bank estimates, company data, bloomberg finance lp deutsche bank ag/hong kongpage 11 15 october 2012 education servic

44、es new oriental key downside risks include: macro softness which would pressurize student enrolments and course fees intensifying competition scope for further investigations should the 20-f not prove satisfactory to the sec figure 9: peer comp as of 15 october 2012 com pany t1 ticker price (u sd) m

45、 kt cap (u sdm ) 2011 p/e (x) 2012e p/b (x) 2013e 2011 2012e 2013e eps cagr (2012-14e) peg (x) 2011e 2012e new oriental education as a result, the recommendations may differ and the price targets and estimates of each may vary widely. in august 2009, deutsche bank instituted a new policy whereby ana

46、lysts may choose not to set or maintain a target price of certain issuers under coverage with a hold rating. in particular, this will typically occur for hold rated stocks having a market cap smaller than most other companies in its sector or region. we believe that such policy will allow us to make

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