Business context and reporting period
This is New Oriental Education & Technology Group Inc.’s annual Form 20-F for the fiscal year ended May 31, 2020, not a standalone “2019 Q4” filing. The filing reports full-year results and includes selected quarterly COVID-19 enrollment information. Amounts below are in U.S. dollars unless noted.
New Oriental provides K-12 after-school tutoring, test preparation, adult language training, online education, school education, educational materials, overseas-study consulting and study tours. At fiscal year-end it operated 104 schools and 1,361 learning centers in 91 cities and employed approximately 41,400 teachers.
Financial and operating highlights
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net revenue | $3,578.7 million | $3,096.5 million | +15.6% |
| Educational programs and services revenue | $3,230.4 million | $2,785.3 million | +16.0% |
| Books and other services revenue | $348.3 million | $311.2 million | +11.9% |
| Operating income | $399.0 million | $305.5 million | +30.6% |
| Net income | $354.9 million | $227.8 million | +55.7% |
| Net income attributable to company shareholders | $413.3 million | $238.1 million | +73.6% |
| Diluted earnings per common share | $2.59 | $1.50 | +72.7% |
| Operating cash flow | $804.5 million | $805.6 million | -0.1% |
Cost of revenue was $1,588.9 million; implied gross profit was approximately $1,989.8 million and gross margin approximately 55.6%, broadly unchanged from FY2019. Operating margin rose to approximately 11.2% from 9.9%. Net margin was approximately 9.9% on consolidated net income; shareholder-attributable net income exceeded consolidated net income because losses were attributable to noncontrolling interests.
Operating costs and expenses increased 13.8% to $3,179.7 million, slower than revenue growth. Cost of revenue rose 15.4%, selling and marketing 15.9%, and general and administrative expenses 10.8%. The company attributed cost growth primarily to more teaching hours, higher teacher compensation, network expansion, rent and increased online marketing.
Cash, liquidity, debt and investment items
- Cash and cash equivalents were $915.1 million at May 31, 2020, down from $1,414.2 million a year earlier. Current assets were $3,756.4 million and current liabilities $2,479.4 million, implying working capital of approximately $1,277.1 million and a current ratio of approximately 1.52.
- Current short-term investments were $2,318.3 million and term deposits $284.8 million. Management said cash and expected operating cash flow should cover anticipated needs for the foreseeable future, while noting restrictions on access to VIE cash and on cross-border currency transfers.
- Operating cash flow was nearly flat. Investing cash use increased to $1,256.4 million, primarily reflecting net purchases of short-term investments, term deposits and $309.5 million of property and equipment. Cash, cash equivalents and restricted cash fell by $498.8 million during the year.
- Long-term bank loans totaled $117.9 million at year-end. The company separately issued $300 million of 2.125% notes due 2025 in July 2020, after the reporting date; proceeds net of costs were approximately $297.1 million.
- ASC 842 adoption brought $1,425.5 million of operating lease right-of-use assets and $1,462.2 million of lease liabilities onto the balance sheet. Undiscounted future operating lease payments were $1,611.2 million, including $407.9 million due within one year.
- Long-term investment impairment losses were $31.8 million, and fair-value losses on long-term investments were $18.5 million. These were lower than the prior year’s $104.6 million fair-value loss, but investment valuations remain sensitive to assumptions and market conditions.
Material changes, outlook and risks
K-12 after-school tutoring, test preparation and other courses generated $3,040.7 million, or approximately 85% of revenue, compared with $2,605.8 million in FY2019. Associated enrollments increased from approximately 8.4 million to 10.6 million. The filing cautions that FY2019 enrollment growth was affected by splitting spring-semester enrollment recording into two parts, which limits straightforward comparison.
COVID-19 disrupted in-person operations from late January 2020. New Oriental moved offline classes to live online instruction through its OMO system and gradually resumed offline operations. Management reported higher-than-normal refunds, difficulty acquiring new students, delayed exams and summer enrollments, and pressure on overseas-test preparation and consulting. Academic-subject tutoring and test-preparation enrollments rose 2.3% year over year to approximately 1.6 million in fiscal Q3, then declined 6.2% to approximately 2.6 million in fiscal Q4. The company warned that pandemic effects could continue into FY2021, affecting revenue and the value of long-term investments. No specific numerical revenue or earnings guidance is provided.
Management planned continued network expansion, with emphasis on fast-growing, higher-margin cities. In FY2020 it opened 321 learning centers and closed 110. It also cited continuing investment in online and offline integration as a way to support teaching continuity and reach students beyond major cities.
- Regulatory and corporate-structure exposure: The VIEs contributed 96.5% of FY2020 revenue. Foreign-ownership restrictions, evolving private-education rules and uncertainty around contractual-control arrangements could impair operations or consolidation.
- Operating and execution risks: Competition, teacher recruitment and retention, teaching consistency, enrollment and pricing, seasonality, rising labor and rental costs, and successful integration of acquisitions may affect growth and margins.
- Other material risks: Foreign-exchange and cash-transfer restrictions, uncertain tax treatment and preferential tax status, lease compliance, cybersecurity and privacy, and the ongoing evolution of regulation affecting online education.
- Litigation: A putative U.S. shareholder class action remained ongoing; a proposed settlement was awaiting preliminary court approval. The company said it believed the case lacked merit and had not estimated a possible loss.
- Audit-market risk: The filing warns that the PCAOB could not inspect the company’s China-based auditor, creating potential U.S. listing and investor-assurance risks. The auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Confirm the intended period: this filing covers FY2020, ending May 31, 2020, rather than a standalone 2019 Q4.
- Track post-pandemic enrollments, refunds, offline reopening, online-course retention and the recovery of overseas-related businesses.
- Assess whether K-12 growth and margin improvement persist after accounting for the prior-year enrollment-recording change and expansion costs.
- Review the liquidity and maturity profile, including the July 2020 notes, bank-loan covenants, lease commitments and the availability of cash held within VIEs.
- Monitor VIE and private-education regulation, tax benefits, audit-inspection developments and the status and potential cost of the shareholder litigation.