新东方高盛英语(Goldman Sa) New Oriental Education

October18,2006NewOrientalEducation&TechnologyGroupInc.(ADR)(EDU)GoldmanSachsGlobalInvestmentResearch1October18,2006INITIATIONNewOrientalEducation&TechnologyGroupChina’sleadinglanguagetrainingcompany;initiatewithNeutralInvestmentviewNewOriental(EDU.US),aleadingtestpreparationandlanguagetrainingcompanyinChina,operates115learningcentersin31cities.NewOrientalhasastrongbrandnamerootedinitstestpreparationcourses;itplanstoexpanditscourseofferingstolanguagetraining,andpossiblytoprofessionalaccreditationcourses.WebelievethePRCprivateeducationmarketishighlyfragmented.NewOrientaliswellpositionedtoleverageitsbrandnameandexpanditscourseofferingswhileincreasingitsmarketshare.WeinitiatecoverageofNewOrientalwithaNeutralratingduetovaluation.GrowthReturns*MultipleVolatilityVolatilityMultipleReturns*GrowthInvestmentProfile:NewOrientalEducationLowHighPercentile20th40th60th80th100th*Returns=ReturnonCapitalForacompletedescriptionoftheinvestmentprofilemeasurespleaserefertothedisclosuresectionofthisdocument.EDUAsiaPacificMediaandEntertainmentPeerGroupAverageCoredriversofgrowthWeforecastFY2007-FY2010revenueCAGRof21%drivenbya6%priceincrease(effectiveblended3%riseincoursefees)and16%enrollmentgrowth.Wemodeloverseastestpreparationat15%revenueCAGR,domestictestpreparationat16%,andnewbusinesses(HighSchooland“PopKids”English)at30%-plus.WeforecastaGAAPnetincomeCAGRof41%,andanon-GAAPnetincomeCAGRof32%.RiskstotheinvestmentcasePotentialupsideriskstoourforecastearnings:(1)higher-than-expectedKids,highschoolEnglishgrowth;(2)newcourses(e.g.,professionalaccreditations);(3)betteroperatingleveragefromlowersalesseasonality.Downsiderisks:(1)regulatorychangesforstandardtests;(2)expansiontofaster-growthbutlower-returnsecondary,tertiaryeducation;(3)anovercapitalizedbalancesheethurtingROE.ValuationWebaseour12-monthtargetpriceofUS$27on25XFY2008E(pre-SBC)EPADS.Thestocktradesat35XFY2007EEPADS,24XFY2008non-GAAPearnings;4XFY2007EbookversusROEof14%,and31XFY2007Eand23XFY2008Efreecash.IndustrycontextWebelieveNewOrientalisthelargestprivateeducationcompanyinChina,witha55%marketpenetrationinoverseastestpreparationand3%inlanguagetraining.INVESTMENTLISTMEMBERSHIPNeutralCoverageview:NeutralChina:MediaKeydataCurrentPrice($)25.90Pricetarget($)27.00Marketcap($mn/US$mn)942.1/942.1Foreignownership(%)--5/055/065/07E5/08EEPS($)New0.780.270.590.86EPSrevision(%)--------EPSgrowth(%)178.7(65.5)120.646.1EPS(dil)(Rmb)New5.891.914.226.00P/E(X)33.496.943.930.1P/B(X)9.79.14.13.6EV/EBITDA(X)----24.217.0Dividendyield(%)--------ROE(%)40.19.814.112.3Priceperformancechart202122232425262728Sep-06353739414345474951NewOrientalEducation&TechnologyGroupInc.(AD(L)MSCIChina(R)Sharepriceperformance(%)3month6month12monthAbsolute------Rel.toMSCIChina------Source:Companydata,GoldmanSachsResearchestimates,FactSet.Priceasof10/17/2006close.KitLow+852-2978-0856|[e-mail](Asia)L.L.C.JamesMitchell,CFA+852-2978-1450|[e-mail](Asia)L.L.C.AdaHo+852-2978-1261|[e-mail](Asia)L.L.C.Analystsemployedbynon-USaffiliatesarenotrequiredtotaketheNASD/NYSEanalystexam.TheGoldmanSachsGroup,Inc.doesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.CustomersintheUScanreceiveindependent,third-partyresearchoncompaniescoveredinthisreport,atnocosttothem,wheresuchresearchisavailable.Customerscanaccessthisindependentresearchat(ADR)(EDU)GoldmanSachsGlobalInvestmentResearch2NewOrientalEducation&Technology(ADR):SummaryfinancialsProfitmodel(Rmbmn)5/055/065/07E5/08EBalancesheet(Rmbmn)5/055/065/07E5/08ETotalrevenue643.3770.3992.11,193.8Cash&equivalents336.0264.91,242.11,509.5Costofgoodssold(273.7)(320.5)(403.6)(487.1)Accountsreceivable2.43.03.94.7SG&A(258.5)(321.1)(394.7)(458.2)Inventory25.936.450.961.4R&D--------Othercurrentassets45.335.745.955.3Otheroperatingprofit/(expense)0.0(64.5)(22.8)(23.9)TTotalcurrentassets409.5340.01,342.81,630.9EBITDA135.5106.0225.6297.2NetPP&E658.2706.6716.6712.3Depreciation&amortization(24.4)(41.8)(54.6)(72.6)Netintangibles0.00.00.00.0EBIT111.164.2171.0224.6Totalinvestments0.00.00.00.0Interestincome3.72.324.468.8Otherlong-termassets45.643.042.541.9Interestexpense(6.3)(9.8)(1.9)0.0TTotalassets1,113.31,089.62,101.82,385.2Income/(loss)fromuncons.subs.0.00.00.00.0Others0.8(2.9)(25.7)(58.9)Accountspayable24.836.238.642.0Pretaxprofits109.253.7167.8234.5Short-termdebt111.482.60.00.0Incometax(5.8)(13.9)(14.3)(16.4)Othercurrentliabilities311.1346.4404.5442.5Minorities(2.4)0.00.00.0TTotalcurrentliabilities447.4465.2443.1484.5Long-termdebt179.7102.60.00.0Netincomepre-preferreddividends103.339