New Oriental Education & Technology Group Inc. — Form 20-F Summary
Period clarification: This is an audited annual report for the fiscal year ended May 31, 2021, not a 2020 Q4 filing. The supplied text does not provide standalone Q4 results. Financial figures are in U.S. dollars and prepared under U.S. GAAP.
Business context
New Oriental provides education services in China through physical schools and learning centers and online platforms. At May 31, 2021, it operated 122 schools and 1,547 learning centers, with approximately 54,200 teachers. Academic after-school tutoring was a major business; the company also offered test preparation, online education, school education, books and related services.
Key financial metrics
| Metric | FY ended May 31, 2021 | FY ended May 31, 2020 |
|---|---|---|
| Net revenue | $4.277 billion | $3.579 billion |
| Operating income | $117.3 million | $399.0 million |
| Net income | $230.0 million | $354.9 million |
| Net income attributable to shareholders | $334.4 million | $413.3 million |
| Basic and diluted earnings per share | $0.20 | $0.26 |
| Cash provided by operating activities | $1.130 billion | $804.5 million |
| Cash and cash equivalents at year-end | $1.612 billion | $915.1 million |
| Total assets / total liabilities | $10.151 billion / $5.133 billion | $6.557 billion / $3.687 billion |
Revenue increased 19.5%, led by educational programs and services, up 21.9%; books and other services declined 2.5%. Cost of revenue rose 28.2%, selling and marketing 34.9%, and general and administrative expenses 30.1%. Calculated gross margin fell to approximately 52.4% from 55.6%; operating margin declined to approximately 2.7% from 11.2%, and net margin to approximately 5.4% from 9.9%. The company recorded $31.8 million of goodwill and intangible-asset impairment charges, including $28.9 million of goodwill impairment.
Liquidity included $1.214 billion in term deposits and $3.435 billion in short-term investments in addition to cash. The reported current ratio was approximately 1.89, compared with 1.52 a year earlier. The company generated $1.130 billion of operating cash flow, including a $420.3 million increase in deferred revenue. Investing cash outflow was $2.178 billion, chiefly reflecting purchases of term deposits and short-term investments as well as $429.2 million of capital expenditures.
The company issued $300 million of 2.125% senior notes due 2025; their carrying amount was $297.6 million at year-end. It repaid $120 million of long-term loans, with no long-term loan balance remaining at year-end. Operating lease liabilities were $1.865 billion, and undiscounted lease payments totaled $2.114 billion. Cash is held partly in consolidated VIEs, and the company cautions that it does not have direct access to VIE cash.
Material changes versus the prior year
- Revenue growth accelerated in education programs, but profitability weakened: operating income fell 70.6% and consolidated net income fell 35.2%. Shareholder-attributable income declined 19.1%.
- Course enrollments in K-12 tutoring, test preparation and other courses increased from approximately 10.6 million to 12.5 million. The company attributed growth chiefly to K-12 tutoring; overseas test-preparation activity remained affected by COVID-19.
- Online education revenue increased 38.1% to $210.6 million, while related operating expenses also rose substantially.
- Operating cash flow rose to $1.130 billion, while investing outflow increased to $2.178 billion. The Hong Kong share offering generated approximately $1.483 billion in net proceeds; the company reported that it had not used those proceeds by May 31, 2021.
- Total assets increased to $10.151 billion, including a significant increase in cash, deposits and short-term investments. Common shares outstanding rose to 1.690 billion, following the Hong Kong listing and a one-for-ten share split.
Outlook, risks and unusual items
- Major regulatory risk after year-end: China’s July 24, 2021 “Alleviating Burden Opinion” imposed extensive restrictions on academic tutoring for compulsory-education students. Measures include nonprofit registration for existing academic tutoring providers, restrictions on operating times and fees, and limits on foreign capital, fundraising and listings. The company said it had stopped, and would not provide, academic tutoring on national holidays, weekends and school breaks; it anticipated possible learning-center closures, layoffs, impairment and severance costs. The full financial impact was not yet determinable.
- The filing reports that academic tutoring institutions would be required to suspend enrollment and fee collection until nonprofit registration was completed. It also warns that customer refunds could be required if the company cannot deliver services associated with deferred revenue. Deferred revenue was $1.926 billion at year-end.
- COVID-19 shifted offline classes online and affected student acquisition and overseas-related services. Management said the OMO online/offline system helped maintain service delivery, but the pandemic could continue to affect FY2022 results.
- Substantially all education revenue was generated by VIEs—99.9% in FY2021. Investors own shares in a Cayman Islands holding company, not equity in the PRC operating entities; contractual control and the regulatory treatment of the VIE structure remain significant risks.
- The filing states that the auditor issued an unqualified opinion and management and the auditor found internal control over financial reporting effective as of May 31, 2021. It also discloses that the China-based auditor was not subject to PCAOB inspection, creating potential U.S. trading and delisting risk.
- A U.S. shareholder class action remained pending; preliminary settlement approval had been granted, but final approval was not assured. The company could not estimate a possible loss range and recorded no liability for the matter.
- Management provided no quantified forward guidance. It stated that available cash and expected operating cash flow should meet anticipated needs for the foreseeable future, while emphasizing significant regulatory uncertainty.
Important facts for investors to verify
- How much FY2021 revenue, deferred revenue and operating capacity are exposed to compulsory-education academic tutoring, and the subsequent effects of regulatory implementation.
- Whether deferred revenue can be fulfilled or must be refunded, and the scale of potential lease termination, impairment and severance costs.
- The sustainability of operating cash flow, given the large contribution from advance tuition collections, and the accessibility of cash held within VIEs.
- Underlying profitability after the steep expense growth and impairment charges, including the cost and returns of online education expansion.
- Current status and potential financial exposure of the shareholder litigation, and developments affecting auditor inspection and U.S. listing risk.