Dedicated outdoor air system is drawing much attention in air-conditioning applications. However, the cooling and dehumidification process of supply air in the dedicated outdoor air system is energy-intensive. In this study, we proposed a highly energy efficient dedicated outdoor air system using novel vapor-compression refrigeration cycle which is featured by a fine combination of two-stage direct-expansion dehumidification, subcooled liquid to-air reheating, and exhaust air heat recovery. The novel system was optimally designed and analyzed with a detailed mathematical model. A prototype was also made and tested. Test results showed that the energy efficiency of the proposed system reaches 5.42 under rated cooling conditions and 26% higher than the conventional one. The model accuracy was also validated with the measured data. Moreover, energy efficiency improvement from feature technologies was numerically analyzed. Control strategy for key operating parameters was developed and illustrated. System performance under varying operating conditions was evaluated as well.