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New Oriental Education's below-expectations guidance casts a shadow over its earnings beat, prompting a rating downgrade from Buy to Hold. The company's guidance is disappointing, but the earnings beat is positive. The revised rating reflects the company's cash distributions and profitability enhancement plans outlined in September.

New Oriental Education & Technology Group Inc. (EDU) has seen its stock rating downgraded from "Buy" to "Hold" by HSBC, following the company's below-expectations guidance. The downgrade comes despite the company reporting a strong earnings beat in its Q4 2025 results.

On July 30, 2025, New Oriental Education & Technology Group Inc. reported its Q4 2025 earnings, showing adjusted earnings of $0.61 per ADS, a significant 69% beat compared to the sell-side's projection of $0.58 million. The company's core revenue expanded by 19% year-on-year, outperforming the mid-point guidance of 11.5% increase. The company also reported improved customer retention and scalability in its learning devices business [1].

However, the company's guidance for the upcoming fiscal year fell short of market expectations. EDU expects its topline to rise by 3.5% and 7.5% in 1QFY26 and FY2026, respectively, which is lower than the analysts' predictions of 10% and 14% growth. The company attributed this to the economic environment and international relations changes affecting its overseas test prep and studies consulting units [2].

The downgrade by HSBC reflects the company's cash distributions and profitability enhancement plans outlined in September. EDU's shareholder return plan for FY26-28 includes distributing no less than 50% of the company’s net income to shareholders via dividend distribution and/or share repurchases. This plan is estimated to distribute a minimum of $0.2 billion to shareholders, which could potentially shrink the company's shareholder yield from 6.5% to 2.9% [2].

Despite the disappointing guidance, the company's Q4 results indicate strong performance in its learning devices business and commitment to cost-cutting moves. EDU's total FY25 top line was slightly under $5 billion, representing a significant market opportunity in the fast-growing learning hardware sector. The company's normalized net margin widened by 2.5 percentage points to 7.9%, driven by efficiency enhancements and cost control [2].

References:
[1] https://www.marketscreener.com/news/hsbc-downgrades-new-oriental-education-technology-to-hold-from-buy-ce7c5fdfd08af022
[2] https://seekingalpha.com/article/4806767-new-oriental-education-below-expectations-guidance