New Oriental Education & Technology Group Inc. — Form 20-F Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended May 31, 2019, not a standalone 2018 Q4 filing. It does not provide a clear standalone Q4 financial result. Financial statements are audited and prepared under U.S. GAAP; amounts below are US$ unless stated otherwise.
Business context and reporting period
New Oriental is a China-focused education provider spanning language and test preparation, K-12 tutoring, schools, preschool, online education, educational content, overseas-study consulting and study tours. It reported 8.4 million student enrollments in FY2019 and operated 95 schools and 1,159 learning centers at year-end. Language training and test preparation generated about 84% of revenue. Substantially all China education operations are conducted through variable interest entities (VIEs) and contractual arrangements.
Key financial metrics
| Metric | FY2018 | FY2019 | Change |
|---|---|---|---|
| Net revenue | $2.447 billion | $3.096 billion | +26.5% |
| Operating income | $263.0 million | $305.5 million | +16.2% |
| Net income | $297.2 million | $227.8 million | -23.3% |
| Net income attributable to New Oriental shareholders | $296.1 million | $238.1 million | -19.6% |
| Basic and diluted earnings per share | $1.87 | $1.50 | -19.8% |
| Operating cash flow | $781.1 million | $805.6 million | +3.1% |
| Cash and cash equivalents at year-end | $983.3 million | $1.414 billion | +43.8% |
- Educational programs and services revenue rose 28.6% to $2.785 billion; books and other services increased 10.3% to $311.2 million.
- Operating expenses grew 27.9% to $2.795 billion. Cost of revenue rose 29.1%, selling and marketing 18.5%, and general and administrative expense 30.1%. Approximate gross margin declined to 55.6% from 56.4%; operating margin declined to 9.9% from 10.7%.
- Cash used in investing activities was $574.7 million, including $269.1 million for property and equipment. Financing cash flow was positive $266.6 million, primarily reflecting $233.3 million from Koolearn’s Hong Kong IPO.
- Current assets were $3.466 billion and current liabilities $2.006 billion, implying a current ratio of about 1.73. Total liabilities were $2.121 billion. The company drew $100 million under a three-year credit facility; the reported year-end long-term loan was $96.5 million, net of issuance costs. Contractual operating lease obligations totaled $1.516 billion.
Material changes versus prior year
- Enrollment rose from about 6.3 million to 8.4 million, with management attributing part of the increase to a change in how spring-semester courses were divided and counted to meet regulatory requirements. Network size expanded from 87 to 95 schools and 994 to 1,159 learning centers.
- Despite strong sales growth, net income fell. Management cited higher income taxes and a sharp reduction in other income, which fell to $10.3 million from $94.1 million.
- FY2019 included a $104.6 million loss from fair-value changes in long-term investments, including a $96.6 million loss on the Sunlands investment after adoption of ASU 2016-01. Realized investment gains were $26.4 million; long-term investment impairments were $5.9 million.
- The company adopted ASC Topic 606 for revenue recognition and ASU 2016-01 for equity investments. The revenue-standard adoption reduced FY2019 reported revenue by $0.6 million relative to the stated no-adoption comparison; the investment standard moved certain fair-value changes into earnings and included a $97.9 million opening-retained-earnings adjustment.
Outlook, commentary, risks and unusual items
- Management said current cash and expected operating cash flow should fund anticipated needs for the foreseeable future. It planned further network expansion, emphasizing fast-growing, high-margin cities; FY2019 included 296 learning-center openings and 123 closures. No quantified forward revenue or earnings guidance is provided.
- Key operating risks include competition, teacher recruitment and retention, maintaining teaching quality during expansion, smaller class sizes and potential margin pressure, seasonality, and dependence on continued demand for admissions and assessment tests.
- Regulatory uncertainty is material: new and evolving rules govern after-school tutoring, online education and private schools, while the March 2019 Foreign Investment Law and preschool rules could affect the VIE structure and operations. The VIEs generated 98.7% of FY2019 revenue.
- The company has no direct ownership of most operating VIE assets and warns that PRC authorities or courts could challenge contractual control arrangements. Cash transfers and dividends are also subject to PRC legal, reserve and foreign-exchange restrictions.
- A U.S. securities class action remained pending: the court dismissed an earlier complaint in July 2019, but plaintiffs filed a second amended complaint and the company’s motion to dismiss was pending. Management said it believed the case lacked merit; potential loss was not estimable.
- Related-party items included $7.9 million of FY2019 rent paid to an entity controlled by the executive chairman and loans to an equity-method investee. The filing also reports a $15.3 million disposal consideration for a subsidiary interest and a $0.1 million gain in the business discussion; the financial-statement note describes the gain as insignificant.
- Management and the auditor concluded internal control over financial reporting was effective as of May 31, 2019. The company nevertheless disclosed that PCAOB inspection access to audit work in China was limited.
Most important facts for investors to verify
- Confirm that the correct comparison is FY2019 versus FY2018; this filing does not report standalone 2018 Q4 results.
- Assess recurring earnings excluding the $104.6 million investment fair-value loss and other investment gains or impairments, and reconcile net income to operating cash flow.
- Review enrollment growth and accounting/counting changes alongside underlying student demand, pricing, and cost growth.
- Track implementation and enforcement of tutoring, online-education, private-school and VIE-related regulations, including the Foreign Investment Law.
- Examine the availability and location of cash, VIE cash-transfer constraints, lease commitments, the credit-facility covenants and the pending litigation.