Deutsche Bank Markets Research
Asia Industry Date China 4 January 2018 Consumer China Education Hotels / Leisure / Initiation of Coverage
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Tallan Zhou Karen Tang Research Analyst Research Analyst Bright future (+852 ) 2203 6464 (+852 ) 2203 6141 [email protected] [email protected]
K12 after-school tutoring is a secular growth sector Top picks We analyze the supply/demand condition of China's K12 after-school tutoring New Oriental (EDU.N),USD101.57 Buy market and conclude the sector will likely see secular growth in the next five TAL Education (TAL.N),USD29.71 Buy years. We believe positive demographic growth, an increased number of Source: Deutsche Bank wealthy families, and greater education awareness are the demand drivers. However, China's supply of top universities is still insufficient and the Companies Featured admission rate remains low. This has led to surging needs for after-school tutoring services. We forecast the K12 tutoring market to see a 13-14% CAGR New Oriental (EDU.N),USD101.57 Buy in 2017-22E, assuming: 1) K12 students see a CAGR of 3%, 2) tutoring 2017A 2018E 2019E penetration rate climbs 2.5% p.a.; and 3) ASP rises (like-for-like basis) 5% p.a. P/E (x) 26.3 42.0 33.6 EV/EBITDA (x) 17.0 33.6 25.3 More demand for education in the long term Price/book (x) 6.7 7.8 6.4
China’s Gaokao (college entrance exam)-takers as a percentage of the newborn population increased to 65% in 2016 from only 25% in 2002, while TAL Education (TAL.N),USD29.71 Buy the birth rate remained unchanged at 0.11-0.12%. However, we now see 2017A 2018E 2019E newborns increasing from 2016, thanks to the government’s two-child policy. P/E (x) 36.8 77.5 52.6 (1.3m more newborns in 2016). Besides the positive demographic drive, more EV/EBITDA (x) 28.1 66.2 39.7 Price/book (x) 10.4 18.4 13.3 middle-class families are increasing spending on K12 tutoring for children. Per Source: Deutsche Bank capita consumption on education has tripled in Beijing, Shanghai and Jiangsu in the past decade amid increased education awareness, with more families investing in education, in order for their children to get into top universities. … but the reality is: China’s supply of top universities is still insufficient Admission rates into top universities (Project 985 and 211 universities) remain low at less than 3% on average. Although students from tier 1 cities such as Beijing/Shanghai/Tianjin have a higher admission rate, the rate is declining. Beijing’s admission rate to the Project 211 and 985 universities declined to 8% in 2016 from 10.6% in 2013. The intensified competition seen in Gaokao has resulted in strong competition from primary school entry exams to high school entry exams, with significant records showing students from “key schools” have a much higher possibility of being admitted into top universities. Consequently, this unbalanced supply/demand creates a huge demand for after-school tutoring, as public school education alone is perceived as insufficient for average K12 students. Valuation and risks We initiate Buy on EDU (New Oriental) (target price USD116) and TAL (target price USD35). EDU and TAL are leaders in the K12 tutoring market but they only account for less than a combined 4% market share. We expect them to grow share robustly, and believe they will penetrate into lower tier cities to increase their total market share. Our valuation is based on DCF, because K12- tutoring is a strong cash flow business with visible and stable growth. We also cross-check our DCF-based valuation by PEG. Risks include: 1) change of policy; 2) disease outbreak; and 3) aggressive network expansion.
______Deutsche Bank AG/Hong Kong Distributed on: 04/01/2018 07:54:27 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. 7T2se3r0Ot6kwoPa 4 January 2018
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Investment thesis
K12 tutoring is a secular growth sector
Our key thesis We believe the boom in China’s K12 tutoring market will continue in the next five years due to: 1) increased birth rates, thanks to the new “two-child policy”; 2) competition remaining intense, as admission rates into top universities (Project 985 and 211 universities) are still low; and 3) the number of wealthy families continues to grow, leading to increased consumption on education expense per family.
Initiating TAL and EDU with Buy We initiate with a Buy on TAL and EDU. TAL and EDU are leaders in the K12 tutoring market but only account for less than a combined 4% market share. We expect them to grow share robustly, penetrating into lower tier cities to increase their total market share.
Figure 1: Valuation comp sheet for HK/US listed education names
Current Market cap Next Yr DB Ticker English name Chinese name price (USD m) Current Yr Next Yr EV/EBITDA Recomm. EDU US Equity EDU 新東方科技教育集團 92.19 14,508 40.7x 30.1x 19.4x BUY TAL US Equity TAL 好未來教育集團 29.29 14,725 76.4x 47.2x 34.1x BUY HK listed education 1569 HK Equity MINSHENG EDUCATI 民生教育 1.53 827 15.9x 13.8x 8.8x NR 6169 HK Equity CHINA YUHUA EDUC 中國宇華教育集團有限公司 3.46 1,502 20.9x 17.7x 14.8x NR 2001 HK Equity CHINA NEW HIGHER 新高教集團 4.07 769 21.6x 16.0x 12.1x NR 6068 HK Equity WISDOM EDUCATION 睿見教育國際控股有限公司 4.48 1,176 24.0x 18.3x 13.3x NR 1565 HK Equity VIRSCEND EDUCATI 成實外教育 4.99 1,972 39.9x 27.4x 21.0x NR 1317 HK Equity MAPLELEAF EDU 楓葉教育 9.10 1,587 20.5x 17.1x 13.9x NR US ADR education REDU US Equity RISE EDUCAT-ADR RISE Education Cayman Ltd 12.55 688 47.7x 21.2x 15.4x NR FEDU US Equity FOUR SEASONS EDU 四季教育(開曼)公司 10.10 469 42.5x 20.4x 15.2x NR BEDU US Equity BRIGHT SCHOL-ADR Bright Scholar Education Hol 18.52 2,168 45.8x 30.4x 18.9x NR Source: Deutsche Bank; Bloomberg Finance LP; pricing as of 12/29/2017
Our forecast for the next five years We forecast the K12 tutoring market will enjoy a CAGR of 13-14% in 2017- 2022E. We expect enrollment and price to be the driver, with total market size growth driven by: 1) increased number of K12 students (at a CAGR of 3%), 2) rising tutoring penetration rates, which we believe will climb 2.5% p.a. (more K12 students to join K12 after-school tutoring classes), and 3) ASP increases (like for like basis) of 5% p.a.
Gaokao penetration and positive demographic driver In the past 10 years, we have seen a stable birth rate in China. However, we have also seen an increasing number of Gaokao students. Gaokao’s penetration rate increased to 65% in 2016 from only 25% in 2002. In addition, the two-child policy started to take effect in 2016, one year after the policy was approved by the government.
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China saw 1.3m more newborns in 2016 and we expect another 2-3m more newborns in 2017E. In the next five years, those who were born in 2016 would become the key consumers of pre-school or young children’s education.
Intense competition to get a spot in top universities remains China’s general admission rate (59% in 2000 and 74.5% in 2017) for university/college has increased significantly in the past two decades. Unfortunately, only 3% of Gaokao students are admitted into top universities (universities from Project 985 and Project 211). Tier one universities’ admission rate is higher, at an average of 15%.
Our channel checks further support our view that more parents intend to enroll their children in after-school tutoring from a young age (primary school students account for 59% of total), to prepare them for the three examinations before Gaokao: entrance examinations for primary school, middle school and high school. In most parts of China, middle schools are generally referred to as “key schools” or ordinary school. Students from these key schools usually have much higher potential to be admitted into for top/tier one universities. As a result, while the total number of primary school students has remained stable in the past decade, the number of students from top tier cities has continued to grow over the same period (more families are aiming to relocate to tier one cities), such as Beijing and Shanghai, etc.
Increased number of wealthy families to drive “education consumption” China’s middle class has been rising quickly, as reflected in urban areas’ growing annual disposable income. The middle class believes receiving public school education alone is not enough for their children, and after-school tutoring will further improve their children’s examination ranking and admission rate. We believe middle-class families are willing to pay more for after-school tutoring than others. According to iResearch, c.60% of middle- class students actively attend tutoring classes and more than 62% of them attend two or more classes. More than 78% of the middle class pay more than RMB10,000 (or USD1,540) for after-school tutoring per year.
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Gaokao penetration and demographic driver
Higher Gaokao penetration and birth rate
Higher Gaokao penetration in China In the past 15 years, there has been a stable set of examination takers (see the figure below) although China’s birthrate has continued to drop since 1996 (Figure 3). On average, there are almost 9m examination-takers every year, according to the National Bureau of Statistics (NBS)
Figure 2: National college entrance examination-taker number (million), 2002- 2016
Source: Deutsche Bank, NBS
A student in China normally takes Gaokao at the age of 18. Those who took the examination in 2002 were mostly born in 1983. We divide the Gaokao takers in 2002 by the number of newborns in 1983 to derive the ratio of examination-takers (penetration rate), as shown in the figure below. China’s Gaokao penetration has continued to increase in the past 15 years, from 25% in 2002 to 65% in 2016.
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Figure 3: Newborn number, 1983-1997 Figure 4: Gaokao takers as a percentage of newborns, 2002-2016
70% 65% 60% 50% 40% 39% 30% 25% 20% 10% 0%
Gaokao takers divided by new borne baby
Source: Deutsche Bank, CEIC Source: Deutsche Bank, CEIC
The increased awareness of enrolling children in schools/after-school tutoring classes with higher education standards has led to a higher penetration rate of Gaokao, in our view. Gaokao is the fairest examination in China. Being admitted into a top college/university typically suggests a brighter and more promising future for the student.
As shown in the figure below, the per capita consumption on education in the Beijing, Shanghai, Zhejiang and Jiangsu provinces (those more developed regions) has continued to increase in the past 15 years. Such a trend is in line with the higher penetration rate of Gaokao takers.
Figure 5: Per capita consumption on education, 2002-2016
Source: Deutsche Bank
Sparkling birth rate increase, thanks to the new two-child policy The number of babies born in China in 2016 jumped 7.9% from the previous year, according to government figures, a jump attributable to China's shift to a two-child policy.
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A total of 17.86m babies were born in 2016, an increase of 1.31m over the total in 2015. After recording a stable birth rate of 0.11-0.12% for a decade, the rate jumped to 0.13% in 2016. China’s public news media (Sohu news, etc) is expecting the number of newborns in 2017 to reach 18-20m, the highest number in the past two decades. We believe a new baby boom is coming in China.
The incremental newborns of 1-2m in 2016 and 2017 will soon (in the next 3-5 years) become the consumption power of the pre-school and young children’s education market.
Figure 6: China’s birth rate (%), 1996-2016
1.8
1.7
1.6
1.5 China adopted two child policy in 2015 1.4
1.3 Birth rate in China
1.2
1.1
1
Source: Deutsche Bank, WIND
Figure 7: Newborns in China (million), 2001-2017E
20.0
19.0
18.0
17.0
16.0
15.0
14.0
13.0
12.0
Source: Deutsche Bank, WIND
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“Gaokao” is tough
Low admission rate for top universities in China
Project 985 and Project 211, China’s “Ivy League” Although university enrollment has expanded since 2000, with c.7.5m of higher education enrollment (vs. only 1.08m in 2000), the resources of top universities in China are still very limited.
Total. As of 1H17, there were 2,914 universities in China according to the Ministry of Education.
985 and 211. There are only 39 universities under the 985 program and 112 universities under the 211 program. These are the top public universities led by the government.
Tier one universities, which Gaokao participants are striving for, is c. 230 (accounts for less than 10% of total).
The rest are ordinary universities, secondary colleges or independent colleges.
Figure 8: University number breakdown in China
Source: Deutsche Bank
Admission rate remains low in China for top universities Figure 9 illustrates the national average and each region’s admission rate for the 985 and 211 universities. On average, China’s top universities’ admission rate was less than 3% in 2017 while that of tier one universities was higher at 15%. Taking Beijing as an example, the admission rate for 211 and 985 universities has declined every year since 2013, while the number of newborns has continued to increase since 2009 (newborn number increased from 142,500 in 2009 to 202,500 in 2016).
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Figure 9: Admission rate for 985 & 211 universities in China, 2017
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00% Jilin Tibet Anhui Hubei Hebei Fujian Ninxia Tianjin Hunan Gansu Henan Beijing Shanxi Shanxi Jiangxi Hainan Jiangsu Qinghai Yunnan Xinjiang Sichuan Guangxi Guizhou Liaoning Zhejiang Shanghai Shandong Chongqing Guangdong Heilongjiang Inner Mongolia 985 211
Source: Deutsche Bank, WIND
Figure 10: Increasing number of newborns (000) in Figure 11: 211 and 985 university admission rates for Beijing, 2009-2016 Beijing, 2013-2016
220 12 209.8 10.6 10.3 210 202.5 10 200 8.2 8.1 187.3 188.9 190 8 180 172.8 167.3 6 170 160 4 150 142.5 142.6 2 140 130 0 2009 2010 2011 2012 2013 2014 2015 2016 2013 2014 2015 2016
Source: Deutsche Bank Source: Deutsche Bank
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Figure 12: Province/City of Tier-1 university admission rate, 2017 Tier-1 university admission rate Tier-1 admission rate Gaokao participants ('000) Tier-1 enrollment ('000) Beijing 30.6% 61 19 Shanghai 26.3% 51 13 Tianjin 24.0% 60 14 Fujian 20.2% 175 35 Hainan 16.4% 60 10 Ningxia 16.4% 69 11 Hubei 16.2% 360 58 Liaoning 16.0% 218 35 Hebei 15.9% 423 67 Gansu 15.5% 292 45 Zhejiang 15.3% 307 47 Guizhou 14.8% 374 55 Qinghai 14.8% 43 6 Shaanxi 14.2% 328 47 Heilongjiang 13.7% 197 27 Inner Mongolia 13.4% 201 27 Guangxi 13.1% 330 43 Jilin 12.5% 148 19 Anhui 12.4% 510 63 Xinjiang 12.3% 166 20 Chongqing 11.9% 249 31 Jiangsu 11.8% 360 43 Hunan 11.7% 402 42 Shandong 11.2% 710 80 Guangdong 11.2% 733 82 Tibet 10.9% 24 3 Sichuan 10.7% 570 61 Jiangxi 10.6% 361 31 Yunnan 10.6% 281 30 Shanxi 9.9% 330 33 Henan 9.6% 820 63 Source: Deutsche Bank
Better high schools, higher Gaokao admission rate
K12 has a total of four screen examinations We believe the K12 tutoring market mainly helps students to gain a spot in top universities in China. As long as the competition for Gaokao remains strong, the outlook for the after-school tutoring market would remain bullish.
Rome is not built in a day. Gaokao is not a one-off examination in China. In order to perform well, a student needs to fight for admission into high-quality primary and high schools. These students need to go through three major screening tests from kindergarten to high school: Zhong Kao (High school entrance exam), Xiao Sheng Chu (Middle school entrance exam) and You Sheng Xiao (Primary school entrance exam), as shown in Figure 13.
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Figure 13: Major entrance exams for China’s K12 education
Source: Deutsche Bank
Better high schools, higher admission rates In China, students in top high schools are expected to perform better in screening exams than those in lower-tier high schools. As an example, students from the top three high schools in Shanghai have an admission rate for tier-1 universities of more than 90%. This compares to general high schools’ c. 30-40%.
Shanghai High School (98.9% tier-1 university admission rate),
High School Affiliated to Fudan University (94% tier-1 university admission rate)
High School Affiliated to Shanghai Jiao Tong (91% tier-1 university admission rate)
In addition, top university enrollment mainly comes from top high schools. In 2016, the top four Shanghai high schools accounted for c.75% of total Peking/Tsinghua University (top two universities in China) admissions in Shanghai.
As shown in the table below, Peking/Tsinghua University admitted 218 students in Shanghai.
There were 164 students from the top four high schools in Shanghai admitted in Peking/Tsinghua University. By the same token, students in top high schools are more likely to come from top middle schools and primary schools.
Figure 14: Peking/Tsinghua University admission in Shanghai, 2016 # of student admission Peking University Tsinghua University Shanghai High School 42 24 No.2 Secondary School Attached to East China Normal University 41 18 High School Affiliated to Fudan University 15 7 High School Affiliated to Shanghai Jiao Tong 8 9 Top 4 Sub-total 106 58 Others 25 29 Total Shanghai 131 87 Source: Deutsche Bank
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K12 tutoring mostly targeting K1-9 students (primary and middle schools) In terms of student breakdown for K12 tutoring, more than 80% of classes are catered for primary and middle school students.
This is mainly due to:
High school students account for only c.14% of total K1-12 students, as shown Figure 15. Among the 166m of total K1-12 students in 2016, c.24m were high school students.
Courses taught in primary and middle schools are comparatively much easier than that in high schools; hence primary and middle school students achieved speedier improvement via after-school tutoring classes.
Figure 15: K1-12 student breakdown
High school 15%
Middle school Primary school 26% 59%
Source: Deutsche Bank
More students heading towards top tier cities
Total primary school students remain stable but top tier cities keeps growing China’s total number of primary school students has remained stable at 90- 100m in the past decade, but the number of primary students from top tier cities such as Shanghai, Beijing and Tianjin has also seemingly increased. On the other hand, the number of primary school students in Chongqing has dropped over the same period (other provinces have the same pattern).
As mentioned previously, Shanghai, Beijing and Tianjin have the highest admission rate for 985 and 211 universities in China. As such, we note more families (mostly middle-class families) in other cities are aiming to relocate to top tier cities so that their children have higher potential for admission into top universities.
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Figure 16: Primary school students remain relatively stable, 2004-2016
120,000,000
100,000,000
80,000,000
60,000,000
40,000,000
20,000,000
- 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
China's primary school students
Source: Deutsche Bank
Figure 17: Primary school student number in Shanghai, Figure 18: Primary school student number in Beijing, 2004-16 2004-16
900,000.00
800,000.00
700,000.00
600,000.00
500,000.00
400,000.00 2004 2005 2006 2007 2008 2009 2010 2014 2015 2016 2011 2012 2013
Beijing
Source: Deutsche Bank Source: Deutsche Bank
Figure 19: Primary school student number in Tianjin, Figure 20: Primary school student number in Chongqing, 2004-16 2004-16
650,000.00 2,900,000.00
600,000.00 2,400,000.00
550,000.00 1,900,000.00
500,000.00 1,400,000.00
450,000.00 900,000.00
400,000.00 400,000.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Tianjin Chongqing
Source: Deutsche Bank Source: Deutsche Bank
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K12 tutoring market’s main battlefield is still in top tier cities. Taking EDU as an example, Beijing contributed 25% and Shanghai contributed 5% of total revenue in FY2017. Its top five cities (Beijing, Shanghai, Xi’an, Wuhan and Hangzhou) contributed almost 50% of total revenue in FY2017. TAL also has the same revenue breakdown by city. Its top five cities (Beijing, Shanghai, Nanjing, Guangzhou, Shenzhen) contributed almost 58% of total revenue.
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More wealthy families
Rise of the middle class
An increased number of Chinese families have crossed the income threshold to become affluent. For Chinese mainland households, an affluent family or middle-class family has an annual income of RMB60k-500k, according to NBS. Middle class families account for c. 10% of China’s total population, or an estimated c. 100m. The figure below illustrates China’s urban disposable income growth in the past one decade.
Figure 21: Disposable income per capita in the China urban area
40,000 20%
19% 18% 35,000 33,616 17% 31,195 16% 30,000 15% 14% 14% 13% 25,000 12% 12% 12% 20,000 10% 10% 10% 9% 9% 8% 15,000 13,786 11,760 6% 10,000 4% 5,000 2%
- 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Disposable income per capita in China urban area yoy
Source: Deutsche Bank
Middle-class families worry about their children’s education According to a survey conducted by iResearch, c.95% of middle class families in China spent more than RMB5,000 on their children’s after-school education in 2016.
In addition, only 16% of middle-class children have never attended an after- school tutoring class in China. 60% of them are actively attending tutoring classes now. In addition, 62% of middle-class children are attending more than one classes, as shown in the figures below.
Middle-class families are generous on tutoring expenses More than 78% of the middle class have spent over RMB10,000 on after- school tutoring for their children. More than half of middle-class families spent more than RMB20,000, as shown in the figure below. The higher the income the family has, the more focus parents will normally have on the education of their children and this normally starts from an early age.
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Figure 22: Chinese middle-class families’ expenditure on after-school education, 2016
Source: Deutsche Bank, iResearch
Figure 23: After-school tutoring for Chinese middle-class families
Source: Deutsche Bank, iResearch
Most middle-class families are concentrated in tier one cities such as Beijing, Shanghai, Shenzhen, and Hangzhou, or regions like Yangtze Delta/Pearl River Delta. The more middle-class families there are, the more competitive it is for them to gain extra education resources for their kids from public schools. Hence, most of the top tutoring companies in China are from tier one cities, simply because of high demand and high ASP. We list the revenue breakdown by city for TAL and EDU in the figures below.
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Figure 24: EDU – revenue breakdown by city, FY1Q18 Figure 25: TAL – revenue breakdown by city, FY2Q18
Beijing 24% Beijing,Shanghai, Guangzhou, Shenzhen, Nanjing 42% Other cities Shanghai 54% 5% Others 58%
Xi'an Wuhan and Hangzhou 17% Source: Deutsche Bank Source: Deutsche Bank
The figure below shows the winter group class prices during the Grade 7 winter holiday session (for one subject in a group class). Shanghai and Beijing on average charge RMB2,000 per child, while in lower tier cities it is usually 30-50% cheaper. For a grade 7 student, the basic three subjects are Math, English and Chinese. Higher grade students (i.e. Grade 9) will have two additional subjects, Physics and Chemistry.
Figure 26: New Oriental’s winter holiday group class price (RMB) Grade 7 (winter holiday training) Math English Chinese Shanghai 2,280 2,280 2,280 Beijing 1,880 1,880 1,880 Guangzhou 1,380 1,380 1,380 Zhuhai 1,240 1,240 1,240 Zhengzhou 1,180 1,180 1,180 Wuxi 1,080 1,080 1,080 Source: Deutsche Bank
Figure 27: TAL Peiyou class winter holiday group class price (RMB) TAL Peiyou Grade 7 (winter holiday) Math English Chinese Shanghai 1,700 1,700 na Beijing 1,805 1,805 1,805 Guangzhou 1,490 1,490 1,490 Zhengzhou 1,280 1,280 1,280 Source: Deutsche Bank
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K12 tutoring sector growth
Market size will continue to post a 13-14% CAGR
13-14% industry CAGR in 2018-2022E We forecast K12 tutoring market will enjoy a CAGR of 13-14% in 2017-2022E. We believe both enrollment and price will be the growth driver, driven by: 1) increased number of K12 students, 2) rising tutoring penetration rate, and 3) rising tutoring expense per student (ASP).
Figure 28: K12 tutoring market size (RMB billion), 2015-2022E
900 797 800 706 700 625
600 551 485 500 426 400 374 326 300
200 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E
K-12 tutoring market (RMBbn)
Source: Deutsche Bank
3% CAGR of K12 students in 2018-2022E According to the Ministry of Education, there were a total of 166m K12 students (99.1m primary, 43.3m middle and 23.7m high school students in China) in 2016. We forecast the number of K12 students will reach c.200m by 2022E, which implies a CAGR of 3% in 2017-2022E.
Primary school students’ enrollment in public schools increased in 2015 and 2016, due to the MOE’s implementation of the “K9 compulsory education system” for the nation and the government’s allocation of more financial education funds (RMB3.1tn, 7.4% yoy). In 2015, the national primary school enrollment rate has increased by 4.3% and in 2016 it increased by more than 2%.
We believe incremental entry level primary school students’ enrollment is the driver for the total number of K12 students. Alongside more financial fund support from the Chinese government, we believe the number of K12 students will witness a 3% CAGR in the next five years.
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Figure 29: Total K12 students (million), 2016-2022E
210
200 198 192 190 187 181 180 176 171 170 166
160
150 2016 2017E 2018E 2019E 2020E 2021E 2022E
K-12 students in China (million)
Source: Deutsche Bank, MOD
2.5% annual increase of K12 tutoring penetration rate in 2018-2022E Currently, only c.50% of K12 students in Mainland China attend tutorial classes after school, which is much lower than the developed market such as Taiwan (c.70% tutoring penetration). We believe this is because tutoring schools are usually concentrated in tier 1-2 cities such as Beijing and Shanghai.
We forecast the tutoring penetration rate will increase to 60% by 2022E, which implies an annual increase of 2.5% in 2018-2022E. We believe this will be mainly driven by tutoring schools’ expansion into lower tier cities and increased urbanization in China.
Figure 30: K12 tutoring penetration rate, 2016-2022E
65%
60% 60% 58% 55% 55% 53% 50% 50% 48% 45% 45%
40%
35% 2016 2017E 2018E 2019E 2020E 2021E 2022E
K-12 tutoring penetration
Source: Deutsche Bank, MOD
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5% ASP CAGR in 2018-2022E In 2016, tutoring expense per student was c.RMB5,000 per year. We forecast the tutoring ASP will record a 5% CAGR in 2017-2022E, in line with the annual K12 tuition fee growth of tutoring schools such as New Oriental and TAL Education.
Figure 31: K12 tutoring ASP, 2016-2022E
7,000 6,700
6,500 6,381 6,078 6,000 5,788 5,513 5,500 5,250 5,000 5,000
4,500
4,000 2016 2017E 2018E 2019E 2020E 2021E 2022E
K-12 tutoring ASP (RMB)
Source: Deutsche Bank, MOD
Fragmented market, leaders have less than 2% market share The after-school tutoring market has low barriers to entry. Apart from market leaders TAL and EDU, there exist many small private tutoring agencies. The two leaders have a combined share of less than 4%; EDU’s K12 market share is only 1.4% and TAL’s market share is only 1.9% as of FY2018E.
Tutoring penetration: lower tier cities are the new focus Tutoring schools are concentrated in tier 1 and tier 2 cities. Tutoring school penetration is more than 80% in developed urban areas such as Beijing and Shanghai. According to the NBS, the urbanization rate in China increased to c.57% in 2016 (vs. c.46% in 2007).
However, tutoring penetration in lower tier cities (40-50%) and rural areas (10- 20%) are much lower than in developed urban areas. We believe lower tier cities are the main expansion areas for tutoring schools in future.
Examples from developed markets on ASP and penetration
Asian countries share the same culture Across Asia, many countries have an after-school tutoring culture as competition to gain a spot in top universities is extremely strong. China has provided upside potential for after-school tutoring class providers from other developed markets. We believe China’s K12 students’ penetration in after- school tutoring classes will continue to climb; we believe the market will become more concentrated (which benefits the leaders) and ASP will continue to rise.
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In South Korea, for example, more than 80-%, 66% and 59% of primary school/middle school/high school students attend after-school tutoring classes. In China, the average penetration rate is 50-60% and we expect key cities’ penetration rate to reach 70% in the near term.
Figure 32: K12 tutoring class penetration rate, South Korea vs. China
100% South Korea 90% China
80%
70%
60%
50%
40%
30%
20%
10%
0% Primary school middle school high school K12 average in Near term China potential in key cities
Source: Deutsche Bank
In Taiwan, family expenditure on education surged between 1974 and 1994. Currently, family education expenditure is c. USD2,400 for each Taiwanese family (including tutoring expenditure). However, the family education expenditure in top tier cities such as Shanghai is only RMB5,000 or USD800.
Figure 33: Family education expenditure in Taiwan, 1974-2014
Source: Deutsche Bank, WIND
In Hong Kong, 54% of Grade 9 and 72% of Grace 12 students receive private supplementary tutoring, according to Professor Mark Bray’s research report (Schooling with a Shadow). Hong Kong’s tutoring market is relatively concentrated; in 2017 the number one tutoring agency accounted for a 12% market share and the top 10 accounted for 37.4%. In China, however, the top two have a market share of less than 4% in total.
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Figure 34: Market share of top 10 in Hong Kong (2017)
A 12%
B 8%
C 6%
D 4% E Others 2% 64%
Source: Deutsche Bank
On ASP, we have quoted 20 years of price inflation from the US. The top two price hike segments are college tuition fees and education expenditure. The traditional consumer price actually dropped during the same period.
Figure 35: Price changes in consumer goods and services in the US, 1997-2017
180 College tuition and education Clothing (%)
New cars (%) 130 Toys (%)
TVs (%) 80 Software (%)
Household energy 30 (%) Public transportation (%) Education (%)
-20 College tuition fees 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (%) Childcare (%)
-70 Food & Beverages (%)
-120
Source: United States Bureau of Labor Statistics (BLS), Deutsche Bank
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Policy is important in China
Major trends of Gaokao reforms
Gaokao reforms benefit branded tutoring companies We believe tutoring companies will benefit more from the Gaokao reforms – with fewer restrictions but more focus on exams. We also believe their tutoring products will become more standardized and centralized, driven by a more unified Gaokao exam paper.
We expect local governments to announce regulations on K12 tutoring schools and teachers’ qualification requirements. We believe unqualified vendors will quit the market. EDU and TAL, the two largest market players, will benefit from the more regulated industry if the government implements any policies.
According to the Ministry of Education, the Gaokao reforms in 2017 included:
More provinces to reduce the tiers of mid-end universities;
Beneficial points to be further cut down;
26 provinces to use national exam papers in 2017,
Grade 11 exams results to be counted in Gaokao in some provinces.
Figure 36: Four major trends in Gaokao reforms
Source: Deutsche Bank, Ministry of Education
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Unified Gaokao exam paper will standardize tutoring materiel Previously, it was hard to standardize the Gaokao exam tutoring material because provinces/cities had different Gaokao exam papers and focuses. More than 15 provinces/cities had their own exam papers before 2015.
One of major Gaokao reforms is to unify the exam paper. Most of the provinces/cities tend to use the same exam paper on a national basis. In 2017, 26 provinces deployed a standard exam paper except Beijing, Shanghai, Tianjin, Jiangsu and Zhejiang.
We believe such a trend will benefit tutoring schools, enabling them to provide more standardized tutoring products to students.
New policy plans to guarantee students’ sleep and physical training hours In mid-December 2017, the Ministry of Education announced the Standards of Compulsory Education (K12) School Management. The new policy mainly focuses on:
Maintain the justice and equity of students’ enrollment. Reduce the number of screening exams for primary and middle school admission.
Guarantee hours of sleep (9/10 hours-sleep a day for primary/middle school students) and physical training (at least 1 hour a day).
Control the quantity of homework and in-school exams.
Not publish student rankings and not use test score as the sole criterion of a student. We believe the new policy will also benefit after-school tutoring centers as it curtails the study hours in schools. As long as good performance in Gaokao is the ultimate goal, students are likely to shift to after-school learning to make up for the reduced hours in schools.
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TAL vs. EDU
How do they differentiate from each other?
Different leverage for strategic expansion. As discussed in detail in our two initiation reports, published alongside this Difference of TAL and EDU is report, TAL expanded by leveraging its centralized R&D, while EDU expanded their leverage for expansion, by leveraging its well-established and good track record of “New Oriental” subject strength, national brand. Such a difference dated back to their corporate “DNA”. footprint and revenue diversity. TAL originated from training primary school students to compete for the Mathematical Olympiad many years ago before extending to the K12 tutoring segment. In early days, not many training materials for the Mathematical Olympiad were available and TAL had to create a question data base and training program itself. Management learnt that a centralized data base and a sizable R&D team (including a centralized decision-making team) would pave the way for future expansion and expansion quality control. TAL management applied the same strategy to the K12 tutoring business. As a result, TAL’s expansion in a new area was a carefully-controlled move and it started a new learning center with limited subjects/small number of students. With support from its centralized team in Beijing, TAL is able to start a new learning center quickly with a strong footing, which usually becomes mature within three years. In addition, TAL’s strength is Mathematics tutoring.
EDU’s “New Oriental” is China’s most established education brand. New Oriental originated from overseas examination preparations such as GMAT, GRE, and ILETS, among others, and extended to other domestic English examination training. EDU started to transfer and shift its focus to K12 in 2008, using the U-CAN middle school brand. Therefore, the success and fast expansion of EDU’s K12 tutoring business is by leveraging its reputation, brands and track record of English examination preparations in the past two decades. English tutoring is also another of its strengths.
Difference in revenue diversity-EDU seems to be more diversified EDU remains a comprehensive education conglomerate, with services ranging from overseas/domestic English examination preparations, overseas study consulting, and private school to K12 tutoring. TAL’s focus is still on K12 tutoring. Although TAL is gradually changing, moving towards EDU’s diversity by acquiring ShunShun Liuxue (in 2016), an overseas study consulting company (revenue contribution is single digit).
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Figure 37: EDU revenue breakdown, FY17 Figure 38: TAL revenue breakdown, 2Q18
Online K- Others Online Others college 6% 6% 1% English 4% 1x1 language 12% training 5%
Overseas K-12 Test Prep & 55% consulting Small class 30% (Xueersi Peiyou, Firstleap, Mobby etc) 81% Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Difference in national footprint From a national footprint perspective, EDU has almost 900 learning centers/schools across China, while TAL has 575 by FY2Q18. As we have mentioned previously, before the boom in K12 tutoring, EDU was already well known for its overseas exam/English language training; EDU hence leveraged its existing learning centers for quick expansion into the K12 business.
Figure 39: Learnings center (schools) breakdown by city, TAL and EDU EDU TAL Regions FY 4Q17 FY 1Q18 FY1Q18 FY 2Q18 Beijing 97 100 145 143 Shanghai 52 52 58 55 Guangzhou 31 31 47 47 Wuhan 49 49 25 25 Nanjing 19 19 49 53 Shenzhen 16 16 31 35 Tianjin 28 28 30 32 Hangzhou 22 28 24 23 Chongqing 14 14 16 16 Sub-total (top tier 328 337 425 429 cities) Other cities 527 562 140 146 Total 855 899 565 575 Source: Deutsche Bank
What do they share in common?
Both names will ride on sector growth Secular growth sector. We believe K12 tutoring is a long-term growth sector thanks to 1) demographic change (China’s two-child policy implemented in 2015); 2) increased competition in all levels of K12 and declining admission rates to top universities; and 3) higher awareness from middle-class families, investing more in children’s education.
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Fragmented market. Both EDU and TAL are leaders in the K12 tutoring market but their combined share is less than 4% of total market share. Even in developed markets like Shanghai and Beijing, EDU and TAL each has market share of 5-10% while enrollment growth in Beijing and Shanghai is over 40% yoy.
Penetration. We believe EDU and TAL’s K12 growth is just starting as they Example: TAL’s Xueersi penetrated into other lower tier cities only recently. However, K12 tutoring is Peiyou small class revenue different from other consumer service names (hotels or F&B); K12 tutoring generated from outside the does not have a franchise model and need not rely on distributors. All learning top-5 key cities gradually centers are operated directly. As a result, we do not expect penetration to be increased from 35% in fast and we expect in the short-term, such expansion is likely to lead to a FY1Q17 to 42% in FY2Q18. margin decline. Yet, considering the potential for K12 is significant in China’s lower tier cities where parents tend to want their children to do well for admission into top universities, we believe TAL and EDU have the centralized curriculum and high quality teacher for penetration.
Growth is robust and this will likely continue TAL and EDU have record robust growth in student enrollment in the past 10 years. EDU’s student base saw a FY06-17 CAGR of 17% and TAL’s K12 student enrollment recorded a FY11-18 CAGR of 57%. Currently, both TAL and EDU have c. 4m of K12 enrollment.
The stellar student enrollment growth has prompted TAL and EDU to expand their capacity (learning centers). TAL added 60 learning centers in FY1Q18 and another 20 in FY2Q18. Those incremental learning centers convert to c. 2,000 classes for Peiyou (489 new Peiyou classes for 2Q18 and the rest for 1Q18. EDU, also added another 43 learning centers in FY1Q18 and 52 in FY4Q17.
While the expansion of learning center has accelerated vs. before, the total capacity growth guidance is high (EDU’s guidance is a 30% increase for FY18 and TAL’s guidance is close to a 50% increase for FY18). Still, the two leaders in the K12 tutoring business still only have a 2-3% market share each.
Figure 40: TAL – small class learning center expansion, Figure 41: TAL – small class student enrollment FY 2008-2021 expansion, FY 2008-2021
400 12,000,000 350 10,000,000 300 8,000,000 250 200 6,000,000 150 4,000,000 100 2,000,000 50 0 0
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
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Figure 42: EDU – learning center expansion, FY 2008- Figure 43: EDU – K12 student enrollment expansion, FY 2021 2008-2021
1,200 12,000,000
1,000 10,000,000
800 8,000,000
600 6,000,000
400 4,000,000
200 2,000,000
0 - FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
FY2018E FY2019E FY2020E FY2021E Source: Deutsche Bank Source: Deutsche Bank
Geographic breakdown, revenue is concentrated from top cities. As we have mentioned previously, top tier cities are still the largest K12 tutoring consumption market, especially Shanghai and Beijing.
TAL: TAL’s Peiyou class accounts for c.80% of total revenue. TAL has 42% of its Peiyou class revenue generated outside the top five cities (Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing).
EDU: EDU has 24% revenue contribution from Beijing and 5% from Shanghai. Its top five cities are Beijing, Shanghai, Xi’an, Wuhan and Hangzhou, which contributed 46% total revenue.
Short term margin may have pressure because of expansion. Short term will see dilemma We believe the dilemma of gaining margins or market share will always of gaining margins or pushing happen in a consumer sector. TAL and EDU will experience the same, in our for expansion view, but likely only in the short term. In the last quarter, both companies’ OP margin dropped c. 4% (TAL dropped 4.5% and EDU dropped 3.9%), largely due to the summer course promotion campaign and expansion of learning centers in the last two quarters. Management from both companies are confident of expanding margins in the long term, when new learning centers start to ramp up and have guided that the margin outlook in the next two quarter should be positive. Note that TAL and EDU were in a fast capacity expansion phase in FY17-18E.
On an annual basis, the number of TAL learning centers increased 40% to 507 in FY17 from 363 in FY16 (vs. only 25% growth in FY15- 16).
The number of EDU learning centers increased 14% to 855 in FY17 from 748 in FY16 (vs. 3% growth in FY15-16).
On a quarterly basis, TAL added 68 learning centers during the last two quarters (FY1Q18 and FY2Q18) to reach a total of 575.
EDU added 96 learning centers during the last two quarters (FY4Q17 and FY1Q18) to reach a total of 899.
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Margin and investment analysis – EDU as an example EDU management has guided that it would take 3-4 years to ramp up a learning center. After 5-8 months of operation, the learning center can reach breakeven and OP margin can hit 20-25% within 3-4 years.
Based on FY2017 data, we calculate faculty number per learning center is c. 47, student number per learning center is c. 5,400 and per student revenue is c. USD336 which is RMB2,200. However, many learning centers have been in operation for many years and their efficiency is much higher. Learning centers in Beijing and Shanghai should have a much higher ASP from each student and student enrollment. Therefore, if we simply use an average number, the OP margin for one single new learning center may be inflated.
Figure 44: EDU – company data FY2017
Company data Total student enrollment 4,800,000 Total learning center 885 Total revenue (USD million) 1,614 Total teachers 22,000 Total non-teacher faculty 20,000 Per LC teachers/faculty 47 Per student's revenue (USD) 336 Per LC students 5,424 Initial investment USD 300-400 K Source: Deutsche Bank
As shown in the table below, the new learning center can break even if: 1) we assume the number of students at 2,300 and per student revenue contribution to the new learning center at RMB1,500 ( i.e. because EDU is penetrating and therefore the ASP should be lower than that in tier one cities); 2) rent cost per sqm is RMB2.5/day; 3) staff cost is c. 27% of total revenue, 4) utility cost is 20% of revenue and 5) depreciation is based on five years (initial investment for a new learning center is c. RMB2.6m).
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Figure 45: OP margin (excluding headquarter expenses) estimation for single learning center
LC revenue Cost calculation
Revenue 1) Rent cost (RMB) No. of student 2,300 RMB/sq.m per day 2.5 Per student revenue 1,500 Total area (sq.m) 1,400 Rev 3,450,000 Total 1,277,500 % of revenue 37%
2) Per staff compensation 20,000.00 Staff number 47 Total 940,000 % of revenue 27%
3) Utilities 690,000 % of revenue 20%
Profit 22,500 4) Depreciation 520,000 OP margin 1% Total Cost 3,427,500 Source: Deutsche Bank estimates
However, our sensitivity analysis suggests increasing the student number and Increasing student enrollment revenue from each student (higher retention rate and higher utilization rate of and per student revenue will the learning center) would expand OP margin to 25-30%. lead to margin expansion for new learning centers. Figure 46: Sensitivity analysis of OP margin between student enrollment and per student revenue
Student enrollment 1% 1,100 1,400 1,700 2,000 2,300 2,800 3,300 3,800 4,300 700 -276% -199% -150% -116% -90% -60% -39% -23% -11% 900 -197% -137% -99% -72% -52% -29% -12% 0% 9% 1,100 -146% -98% -66% -44% -28% -9% 5% 15% 22% 1,300 -111% -70% -44% -25% -12% 5% 16% 25% 31% 1,500 -86% -50% -27% -11% 1% 15% 25% 32% 38% 1,700 -66% -35% -15% -1% 10% 22% 31% 38% 43% -51% -23% -5% 8% 17% 29% 36% 42% 46% Per stduent revenue 1,900 2,100 -39% -13% 3% 15% 23% 33% 40% 46% 50% 2,300 -28% -5% 10% 20% 28% 37% 44% 49% 52%
Source: Deutsche Bank estimates.
We believe in the long-term demand for K12 tutoring, and therefore, we are confident that new learning centers will start to turn into profit, leading to margin recovery in the long term.
Valuation
We initiate with Buy on TAL and EDU. Both are leaders in the K12 tutoring market but only account for less than a combined 4% market share. We believe they will grow share robustly, penetrating into lower tier cities to increase their total market share.
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Our primary valuation method is DCF, to capture long-term growth and strong cash flow generating capability. Our price target converts into 1.1 PEG for both TAL and EDU, which we believe is reasonable, given their long-term growth sustainability.
Figure 47: Valuation comp sheet for HK/US listed education names
Current Market cap Next Yr DB Ticker English name Chinese name price (USD m) Current Yr Next Yr EV/EBITDA Recomm. EDU US Equity EDU 新東方科技教育集團 92.19 14,508 40.7x 30.1x 19.4x BUY TAL US Equity TAL 好未來教育集團 29.29 14,725 76.4x 47.2x 34.1x BUY HK listed education 1569 HK Equity MINSHENG EDUCATI 民生教育 1.53 827 15.9x 13.8x 8.8x NR 6169 HK Equity CHINA YUHUA EDUC 中國宇華教育集團有限公司 3.46 1,502 20.9x 17.7x 14.8x NR 2001 HK Equity CHINA NEW HIGHER 新高教集團 4.07 769 21.6x 16.0x 12.1x NR 6068 HK Equity WISDOM EDUCATION 睿見教育國際控股有限公司 4.48 1,176 24.0x 18.3x 13.3x NR 1565 HK Equity VIRSCEND EDUCATI 成實外教育 4.99 1,972 39.9x 27.4x 21.0x NR 1317 HK Equity MAPLELEAF EDU 楓葉教育 9.10 1,587 20.5x 17.1x 13.9x NR US ADR education REDU US Equity RISE EDUCAT-ADR RISE Education Cayman Ltd 12.55 688 47.7x 21.2x 15.4x NR FEDU US Equity FOUR SEASONS EDU 四季教育(開曼)公司 10.10 469 42.5x 20.4x 15.2x NR BEDU US Equity BRIGHT SCHOL-ADR Bright Scholar Education Hol 18.52 2,168 45.8x 30.4x 18.9x NR Source: Deutsche Bank
Our forecast vs. consensus. Our earnings forecast is slightly higher than consensus as our OP margin is higher. We believe short-term margins will see pressure, given both TAL and EDU have expanded fast and it takes time for them to “digest”. We believe the next two quarters should see margins recover gradually.
Figure 48: DB vs. Consensus, TAL
Year to 28 Feb DB estimates Consenses Difference USD m FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Net revenue 1,705 2,511 3,562 1,701 2,584 3,651 0% -3% -2% EBIT (GAAP) 199 326 492 212 369 548 -6% -12% -10% EBIT (non-GAAP) 247 397 592 215 381 592 14% 4% 0% Net profit (GAAP) 182 303 467 181 310 469 1% -2% 0% Net profit (non-GAAP) 230 373 568 225 364 546 2% 3% 4%
Source: Deutsche Bank, Bloomberg Finance LP
Figure 49: DB vs. Consensus, EDU
DB estimate Consensus Difference USD m FY18E FY19E FY20E FY2018E FY2019 FY2020 FY2018E FY2019 FY2020 Net revenue 2,339 2,909 3,701 2,337 2,984 3,791 0% -3% -2% EBIT (GAAP) 346 443 566 333 469 628 4% -5% -10% Net profit (non-GAAP) 380 478 610 355 477 648 7% 0% -6%
Source: Deutsche Bank, Bloomberg Finance LP
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Risks
Government policy If the government tightens the current law on K12 tutoring learning center operation certificates or if the government limits a student’s after-school tutoring time, it will have a negative impact on the industry. In addition, if the government decides to force top universities to accept more students, the Gaokao competition may ease, in turn dampening demand for after-school classes.
Reduced reliance on certain admissions and assessment exams After-school tutoring companies’ success is highly dependent on the continued use of certain admissions and assessment exams in China. A decline in the use of such exams by higher educational institutes would thus adversely affect them. If the Ministry of Education reformed the national exams or lowered the difficulty level of the exams, tutoring companies would be adversely impacted.
Disease outbreaks could result tin closure of learning centers Learning centers could be adversely affected by an outbreak of diseases such as SARS and avian influenza, mainly due to the high population density in China. A disease outbreak could force TAL and EDU to close down their learning centers, negatively impacting their revenue.
Difficulties in attracting qualified staff Teaching professionals are particularly critical to a tutoring company’s business as they interact with the students daily and are the key to retaining students. The inability to attract and retain suitable professionals could adversely affect the day-to-day operations of the learning centers and therefore negatively affect the reputation of tutoring companies, leading to a drop in student enrollment or retention rate.
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Appendix: 985 and 211
985: “985 Project” is a project aimed at increasing the development speed of, and gaining more of a reputation for, China’s universities. The 985 project was announced by Chinese President Jiang Zemin at the 100th anniversary of Peking University on May 4, 1998. Through the 985 project, China showed its ambition to build world-class universities in the 21st century. The 985 project involves both national and local governments allocating large amounts of funding to certain universities to build new facilities such as research centers, hold international conferences, attract world-renowned visiting scholars, and help Chinese students to attend conferences abroad. When it was first announced in 1998, funding for Project 985 was made available to an elite group of nine universities. These nine universities made up the C9 League in 2009, which is the Chinese equivalent of the Ivy League. By the end of the first phase of the project, 35 universities were sponsored. In the second phase of the project, four more universities were added to the list, bringing the total number to 39. In 2011 it was announced that the project would not admit other universities.
211: “211 Project“ was initiated in 1995 by the Ministry of Education of the People's Republic of China, a project to enhance the research standards of high-level universities and cultivate strategies for socio-economic development. So far China has more than 118 institutions of higher education that have been designated as 211 Project institutions, and from 1996 to 2000, approximately US$2.2 billion was distributed to this project. Among those universities, 6% met certain scientific, technical, and human resources standards and offer advanced degree programs. Today, four-fifths of doctoral students and one- third of undergraduates are trained by project 211 universities in China. They offer 85% of the state's key subjects, hold 96% of the state's key laboratories, and utilize 70% of scientific research funding in China.
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Figure 50: Project 985 and 211 universities
Project 985 and 211 universities Anhui University Nanjing University of Aeronautics and Astronautics Beijing University of Technology Nanjing University of Science and Technology Beijing Foreign Studies University Nankai University Beijing Forestry University (also known as Beilin University) Ningxia University Beijing Institute of Technology National University of Defense Technology Beijing Jiaotong University North China Electric Power University Beijing Normal University North China Electric Power University (Baoding) Beijing Sport University Northeast Agricultural University Beihang University (formerly known as Beijing University of Aeronautics and Astronaut Northeast Forestry University Beijing University of Chemical Technology Northeast Normal University Beijing University of Chinese Medicine Northeastern University Beijing University of Posts and Telecommunications Northwest A&F University Beijing University of Technology Northwest University Central China Normal University Northwestern Polytechnical University Central Conservatory of Music Ocean University of China Central South University Peking University Central University of Finance and Economics Qinghai University Chang'an University Renmin University of China China Agricultural University Second Military Medical University China Pharmaceutical University Shaanxi Normal University China University of Geosciences (Beijing) Shandong University China University of Geosciences (Wuhan) Shanghai International Studies University China University of Mining and Technology (Beijing) Shanghai Jiao Tong University China University of Mining and Technology Shanghai University China University of Petroleum (Beijing) Shanghai University of Finance and Economics China University of Petroleum (Huadong) Shihezi University China University of Political Science and Law Sichuan Agricultural University Chongqing University Sichuan University Communication University of China South China Normal University Dalian Maritime University South China University of Technology Dalian University of Technology Southeast University Donghua University Southwest University East China Normal University Southwest Jiaotong University East China University of Science and Technology Southwestern University of Finance and Economics Fourth Military Medical University Sun Yat-sen University Fudan University Soochow University Fuzhou University Taiyuan University of Technology Guangxi University Tianjin Medical University Guizhou University Tianjin University Hainan University Tibet University Harbin Engineering University Tongji University Harbin Institute of Technology Tsinghua University Hebei University of Technology University of Electronic Science and Technology of China Hefei University of Technology Beijing University of International Business and Economics Hohai University University of Science and Technology Beijing Huazhong Agricultural University University of Science and Technology of China Huazhong University of Science and Technology Wuhan University Hunan Normal University Wuhan University of Technology Hunan University Xiamen University Inner Mongolia University Xi'an Jiaotong University Jinan University Xidian University Jiangnan University Xinjiang University Jilin University Yanbian University Lanzhou University Yunnan University Liaoning University Zhejiang University Minzu University of China (formerly known as the Central University for Nationalities) Zhengzhou University Nanchang University Zhongnan University of Economics and Law Nanjing Agricultural University Nanjing Normal University Nanjing University Source: Deutsche Bank
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The authors of this report wish to acknowledge the contribution made by Mengyi (Matt) Zhang, an employee of CRISIL Global Research & Analytics, a division of CRISIL Limited, a third-party provider of offshore research support services to Deutsche Bank.
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Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure New Oriental EDU.N 97.79 (USD) 2 Jan 18 6,8,9,14,15 TAL Education TAL.N 30.27 (USD) 2 Jan 18 6,9,14 Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.
6. Deutsche Bank and/or its affiliate(s) owns one percent or more of a class of common equity securities of this company calculated under computational methods required by US law.
8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months.
14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.
15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.
Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.
6. Deutsche Bank and/or its affiliate(s) owns one percent or more of a class of common equity securities of this company calculated under computational methods required by US law.
9. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by India law.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Tallan Zhou
Deutsche Bank AG/Hong Kong Page 35
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Historical recommendations and target price: New Oriental (EDU.N) (as of 1/2/2018)
100.00 13 Previous Recommendations
90.00 10 12 14 Strong Buy Buy 11 80.00 Market Perform 9 Underperform 70.00 Not Rated Suspended Rating 60.00 7 8 Current Recommendations 50.00 5 6 4 Buy 3 40.00 Hold
Security Price 2 1 Sell 30.00 Not Rated Suspended Rating 20.00 *New Recommendation Structure as of September 9,2002 10.00 **Analyst is no longer at Deutsche 0.00 Bank
Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Date
1. 19/01/2016: Hold, Target Price Change USD26.00 Alan Hellawell** 8. 17/01/2017: Buy, Target Price Change USD55.00 Alvin Jiang** 2. 24/02/2016: Upgrade to Buy, Target Price Change USD35.00 Alvin 9. 26/04/2017: Buy, Target Price Change USD72.00 Alvin Jiang** Jiang** 3. 18/04/2016: Buy, Target Price Change USD38.00 Alvin Jiang** 10. 08/06/2017: Buy, Target Price Change USD82.50 Alvin Jiang** 4. 19/04/2016: Buy, Target Price Change USD40.00 Alvin Jiang** 11. 12/07/2017: Buy, Target Price Change USD90.00 Alvin Jiang** 5. 05/07/2016: Buy, Target Price Change USD47.00 Alvin Jiang** 12. 07/09/2017: Buy, Target Price Change USD96.00 Alvin Jiang** 6. 20/07/2016: Buy, Target Price Change USD46.00 Alvin Jiang** 13. 24/10/2017: Buy, Target Price Change USD105.00 Alvin Jiang** 7. 25/10/2016: Buy, Target Price Change USD52.50 Alvin Jiang** 14. 04/12/2017: No Recommendation, Target Price Change USD0.00 Maria Ma
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Historical recommendations and target price: TAL Education (TAL.N) (as of 1/2/2018)
200.00 Previous Recommendations
180.00 Strong Buy Buy 160.00 10 Market Perform Underperform 140.00 9 Not Rated 8 Suspended Rating 120.00 Current Recommendations 100.00 6 7 Buy 80.00 Hold
Security Price 4 5 Sell 2 3 60.00 1 Not Rated Suspended Rating 12 13 40.00 11 14 *New Recommendation Structure as of September 9,2002 20.00 **Analyst is no longer at Deutsche 0.00 Bank
Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Date
1. 27/01/2016: Buy, Target Price Change USD51.50 Alvin Jiang** 8. 28/04/2017: Buy, Target Price Change USD130.00 Alvin Jiang** 2. 24/02/2016: Buy, Target Price Change USD58.00 Alvin Jiang** 9. 08/06/2017: Buy, Target Price Change USD148.00 Alvin Jiang** 3. 18/04/2016: Buy, Target Price Change USD57.00 Alvin Jiang** 10. 27/07/2017: Buy, Target Price Change USD155.00 Alvin Jiang** 4. 05/07/2016: Buy, Target Price Change USD70.00 Alvin Jiang** 11. 17/08/2017: Buy, Target Price Change USD25.80 Maria Ma 5. 26/07/2016: Buy, Target Price Change USD69.00 Alvin Jiang** 12. 08/09/2017: Buy, Target Price Change USD35.00 Alvin Jiang** 6. 27/10/2016: Buy, Target Price Change USD79.00 Alvin Jiang** 13. 26/10/2017: Buy, Target Price Change USD33.00 Alvin Jiang** 7. 19/01/2017: Buy, Target Price Change USD85.00 Alvin Jiang** 14. 04/12/2017: No Recommendation, Target Price Change USD0.00 Maria Ma
Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 600 share-holder return (TSR = percentage change in 57 % share price from current price to projected target price 500 plus pro-jected dividend yield ) , we recommend that 400 investors buy the stock. 300 33 % 200 Sell: Based on a current 12-month view of total share- 17 % 10 % 17 % holder return, we recommend that investors sell the 100 14 % stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target prices supersede previously published research.
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