New Oriental gets new lesson from souring U.S.-China relations

China’s leading private provider of education services blamed changing international relations for a slowdown in its business catering to students planning to study abroad

Key Takeaways:

• New Oriental’s revenue from overseas test preparation services grew just 7% in its latest fiscal quarter, down sharply from 21% growth in the previous quarter
• The education company expects revenue from its overseas study consulting business to be flat in its new fiscal year that starts in June, a huge slowdown from previous strong gains

By Doug Young

China’s private education companies learned a difficult lesson four years ago when Beijing wiped out most of their business by banning after-school tutoring services for K-12 students. Now, the group could be learning yet another difficult new lesson as mounting U.S.-China tensions, combined with increasing consumer caution, cast a chill over studying abroad.

That was the loudest message coming through in the latest quarterly report from sector leader New Oriental Education & Technology Group Inc. (EDU.US; 9901.HK), which had been rebounding strongly from the earlier crackdown of 2021. Until now, that is.

After seeing its revenue contract for two straight years following the crackdown, New Oriental finally regained its footing in its fiscal year through May 2024. It reported 43% growth that year on its new mix of overseas test preparation and overseas consulting services, along with domestic test preparation services targeting adults and college students. All of those were still allowed after the crackdown that focused mostly on reducing the pressure on K-12 students in core curriculum areas covered by China’s national college entrance exam.

While New Oriental looks likely to keep its annual revenue growth streak alive in its current fiscal year, which runs through the end of May, it slipped into revenue contraction in the three months to February, the third quarter of its fiscal year. The company’s revenue fell 2% year-on-year during the three-month period to $1.18 billion from $1.21 billion a year ago, according to its latest report released on Wednesday in the U.S.

The company was quick to point out that excluding results from its Hong Kong-listed East Buy (1797.HK) unit, its revenue still grew by 21.2% year-on-year in its latest fiscal quarter to just over $1 billion. East Buy was formerly New Oriental’s online education arm, but shifted to e-commerce after the crackdown. It initially found big success by selling products via livestreaming, often using former teachers as hosts. But that business had its own meltdown last year after a blowup between the company and its star livestreamer, a former English teacher.

While the East Buy brouhaha is relatively old news by now, the sudden shakiness in New Oriental’s overseas-related business is quite new. Many Chinese were already growing uneasy about sending their children to study in the U.S., the most popular study-abroad destination, amid growing stories about students being hassled by immigration officials upon arrival.

Things only grew worse after Donald Trump took office in January and proceeded to deport or try to deport some foreign students who had spoken out for Palestinians during the Gaza conflict in Israel. Trump’s latest threat to ban Harvard from admitting foreign students unless it agrees to a list of his administration’s demands has only made parents in China and other countries even more apprehensive about sending their children to the U.S. to study.

Fallout from the increasingly unwelcoming signals has yet to show up in broader statistics, with a record 1.1 million international students attending U.S. colleges in 2023-2024, according to the Open Doors 2024 Report on International Educational Exchange. But anecdotal stories suggest the number of Chinese applicants to many U.S. schools is dropping dramatically as parents have second thoughts about such a choice. China’s slowing economy is only exacerbating the drop-off as many parents feel less confident about their ability to pay for such an expensive education.

Shifting international relations

All that said, we’ll return to New Oriental and how its latest results reflect the rapidly falling demand for study abroad. While the company’s revenue grew 21.2% in the latest quarter excluding East Buy, that figure represented a slowdown from the 31.3% growth it recorded on the same basis in the previous quarter.

In fact, New Oriental’s overall report showed its growth rapidly slowed in all of its major categories, not just overseas-related ones, reflecting a consumer pullback on such discretionary spending. But the slowdown in overseas-related businesses was the most pronounced.

The company said revenue from its overseas test preparation services business rose 7.1% in the latest quarter, slowing from 21% growth in the previous quarter. The latest 21.4% growth for its overseas study consulting services revenue was also down from 31% growth in the previous quarter.

The company expects revenue from its overseas test preparation services to grow between 5% and 10% in its next fiscal year that begins in June, CFO Stephen Yang said on New Oriental’s earnings call. But he added that revenue from overseas study consulting is expected to be flat for the year, marking a huge slowdown from the strong double-digit growth it previously reported.

“I think the overseas-related businesses, including the overseas test prep and the consulting business, the slowing down is due to the impact of the macro economy situation and the international relations change situation,” Yang said. He added that based on current conditions, the company expects its overseas-related business, which includes both test preparation and study abroad consulting services, to rise between just 5% and 10% in the three months through May, the final quarter of its fiscal year.

One of the company’s other major business areas, domestic test preparation targeting adults and college students, posted 17% revenue growth in the latest quarter, which was also a sharp slowdown from the 34.9% growth in the previous quarter. One of the few bright spots in the report was the company’s new education initiatives, though even that segment’s 34.5% revenue growth for the quarter was down from the 42.6% increase in the previous quarter.

The slowing growth, combined with other margin pressures, left New Oriental with a net profit of $87 million for the latest quarter, flat from a year earlier.

Investors were surprisingly calm about a report that didn’t seem to offer much positive news. The company’s U.S.-listed shares fell 0.7% on Wednesday after the announcement’s release, while its Hong Kong shares rose 1.7% on Thursday. New Oriental’s shares are still a shadow of their former self, down by more than two-thirds from where they traded before the 2021 crackdown. Perhaps investors have gotten used to such bad news and are no longer so worried. And at least in the latest case, it’s always possible that demand for study abroad services could bounce back if and when U.S.-China relations improve.

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