|作者：||Tommy WONG,Crystal LI|
|摘要：||Report title:China Tutoring Education Sector - May quarter margin softness from investment into the future
Analyst:Tommy WONG,Crystal LI
■ We lowered our May quarter earnings for TAL (TAL US, BUY) and New Oriental (EDU US, BUY) from lower operating margin, due to elevated expenses for future growth, largely from online segment
■ Recent investor meetings indicate some polarization of views
■ Structural growth intact. Maintain BUY, TP unchanged
May quarter softer margins, positive outlook unchanged
After recent checks, we lowered our May quarter operating margin/earnings forecast for TAL and EDU due to higher expenses. For TAL, we cut 1Q20E non-GAAP EPADS from lowering operating margin from 13.8% to 11.8% (450 bps lower compared to 1Q19). However our TAL FY20E full year earnings forecast remains unchanged, as we maintain our view that the company can “make-back” its operating margin in later quarters. For EDU we lowered FY19E non-GAAP EPADS from USD2.85, to USD2.64, though we kept FY20E forecast unchanged. May quarter is a seasonally softer quarter for both TAL and EDU. Positive outlook for TAL and EDU remains unchanged due to their industry consolidation leadership and growth opportunities.
Investor polarization on TAL and EDU: policy and valuation
After strong year to date rally, one camp of investors remain bullish on TAL and EDU outlook, the other camp are concerned about policy and valuation. Relating to policy, we tallied a number of recent municipal policies such as 1) After school extracurricular activities, 2) Public tutoring “free” platforms, 3) Prohibition of entrance exams for secondary school enrollment. These policies discussed are not new and have been implemented for some time. We highlight our two industry leaders have very low market share despite their revenue size in this highly fragmented market. We believe even if the industry faces lower growth, the two companies can continue to maintain fast growth through industry consolidation. Our view on government policy impacts is neutral with high degree of compliance achieved by TAL and EDU through 2018. We believe their valuations are justified by taking a longer term view of the structural growth story, and rapid earnings growth, with TAL at 1.3x and EDU at 0.8x PEG (TAL premium from execution and margin performance).
Maintain BUY with TP unchanged for TAL and EDU
We maintain BUY rating for TAL: growth from its exceptional brand driven growth more than offsetting near-term drag from online expansion. Our next 12-mo target price is unchanged at US$46.1 (20% upside), based on 45x P/E on next 12-mo EPADS, implying 52x/35x FY20E/21E P/E. For EDU: continued offline growth with FY20E margin recovery from rationalized expense control with focus on utilization and student retention. Our next 12-mo target price is unchanged at US$117.3 (22% upside), based on 32x P/E and next 12-mo EPADS, implying 33x/25x FY20E/21E P/E.