1、16,14,12,10,Deutsche BankMarkets Research,RatingBuyAsiaChina,CompanyTAL EducationGroup,Date23 January 2013Forecast Change,ConsumerEducation Services,Reuters,Bloomberg,Exchange Ticker,Price at 22 Jan 2013 (USD)Price target - 12mth (USD)52-week range (USD),8.8313.8011.91 - 7.30,XRS.N,XRS UN,NYS,XRS,HA
2、NG SENG INDEX,23,659,Headwinds on top-line growth,compensated by margin expansionEnrollment growth hit by slower center expansion and regulatory changeXRS recorded a top line of US$49m in FY3Q13 (+20% YoY) which was largelyin line with company guidance, but slightly below consensus. The companywitne
3、ssed slower student enrollment growth of a mere 9% YoY, which we,Vivian HaoResearch Analyst(+852) 2203 Key changes,believe is attributable to 1) negative regulatory impact, and 2) muted networkexpansion and scale-back in the 1*1 segment (total network -6% YoY), giventhe companys strategic focus on o
4、perational efficiency and quality of growth.Buy maintained, underpinned by the upside potential to our target price.Significant margin improvement due to leverage and efficiencyXRS has largely completed its learning center (LC) rationalization in the past,Price targetSales (FYE)Op profmargin (FYE)Ne
5、t profit(FYE),15.60 to 13.80 242 to 230 10.7 to 14.3 24.3 to 34.3 ,-11.5%-5.0%33.5%41.3%,34 quarters, especially on the less profitable 1*1 centers. The tighter controlon LC network expansion and the rationalization has resulted in substantiallyimproved center utilization and operating efficiency, l
6、ifting XRSs marginssignificantly. XRS recorded GM of 45% (+350bps YoY), non-GAAP EBIT marginof 8.8% (+240bps YoY), and non-GAAP net margin of 15.2% (+810 bps YoY),well above our and Street estimates of a breakeven, seasonally slow quarter.,Price/price relative,Rebalancing outlook: re-accelerating ex
7、pansion + continued margin focusXRS plans to pick up the pace on growth in 1H14 with 30 net new LC additionsplanned for small class but no new expansion on the 1*1 front, which will onlyserve as a complementary offering to core small class programs. However,sustaining a satisfactory utilization rate
8、 will continue to be XRSs key operatinggoal. Further, the negative impact of the ban on Olympiad-style math trainingin Beijing is expected to persist for the next 2-3 quarters. Thus, we expect,861/11 7/11 1/12TAL Education GroupHANG SENG INDEX (Rebased)Performance (%) 1mAbsolute -9.2,7/123m2.7,12m-1
9、7.0,slower near-term top-line growth, whilst the bottom line should remain intact,HANG SENG INDEX,5.1,9.0,17.6,due to operating efficiencies and leverage of the small class business model.Trimming our target price by 11% to US$13.80; maintaining BuyGiven the near-term pressure on top-line growth, dr
10、iven by policy change andslower network expansion, we reduce FY13/14E revenues by 5%/7%. However,we expect XRSs margins to benefit from business leverage and efficiency, andthus raise net income estimates by 41%/23% for FY13/14. However, we trimour target price by 11% to US$13.8, based on 26x (prior
11、 37x) PE CY13E againsta lower 3-year EPS CAGR of 29% (prior 41%) with a moderated LT growthassumption alongside sector de-rating. The revised target price still suggests56% upside potential; Buy maintained. Key risks: unfavorable policy changesand intense competition.Forecasts And Ratios,Year End Fe
12、b 28Sales (USD)Reported NPAT (USD)DB EPS FD (USD)OLD DB EPS FD (USD)% ChangeDB EPS Growth (%)PER (x),2011A110.624.00.350.350.0%54.642.4,2012A177.524.30.310.310.0%-11.034.8,2013E229.734.30.430.3141.3%37.820.4,2014E297.044.70.550.4523.1%27.616.0,2015E371.457.80.700.700.5%26.912.6,Source: Deutsche Bank
13、 estimates, company data_Deutsche Bank AG/Hong KongDeutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors shouldconsider this
14、report as only a single factor in making their investment decision. DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.,23 January 2013Education ServicesTAL Education Group,Model updated:23 January 2013,Fiscal year end 28-Feb,2010,2011,2012,2013E,2014E,2015E,Running
15、 the numbers,Financial Summary,AsiaChinaEducation ServicesTAL Education Group,DB EPS (USD)Reported EPS (USD)DPS (USD)BVPS (USD)Weighted average shares (m)Average market cap (USDm),0.230.230.000.460na,0.350.350.202.066986,0.310.310.002.477841,0.430.430.252.979674,0.550.550.003.481674,0.700.700.004.08
16、3674,Reuters: XRS.N,Bloomberg: XRS UN,Enterprise value (USDm),na,787,642,434,370,291,Valuation Metrics,Buy,P/E (DB) (x)P/E (Reported) (x),nana,42.442.4,34.835.0,20.420.4,16.016.0,12.612.6,Price (22 Jan 13)Target Price52 Week rangeMarket Cap (m),USD 8.83USD 13.80USD 7.30 - 11.91EURm 506USDm 674,P/BV
17、(x)FCF Yield (%)Dividend Yield (%)EV/Sales (x)EV/EBITDA (x)EV/EBIT (x),0.00nananmnmnm,5.164.91.37.127.231.0,4.55nm0.03.624.130.9,3.074.92.81.911.113.2,2.629.00.01.27.18.2,2.2110.80.00.84.14.6,Company Profile,Income Statement (USDm),TAL Education Group is a leading K-12 after-schooltutoring services
18、provider in China with operations in sixmajor Chinese cities. Tutoring services are provided for allcore subjects mainly in the form of small classes andpersonalized services.Price Performance161412108,Sales revenueGross profitEBITDADepreciationAmortisationEBITNet interest income(expense)Associates/
19、affiliatesExceptionals/extraordinariesOther pre-tax income/(expense)Profit before taxIncome tax expenseMinoritiesOther post-tax income/(expense)Net profitDB adjustments (including dilution)DB Net profit,693418111500001610014014,1115829312510002730024024,1788727512130042840024024,23012039603330034050
20、034034,29715652704540035270045045,371199718063500271130058058,6Jan 11Apr 11Jul 11 Oct 11 Jan 12Apr 12Jul 12 Oct 12,Cash Flow (USDm),Margin Trends28242016,TAL Education GroupHANG SENG INDEX (Rebased),Cash flow from operationsNet CapexFree cash flowEquity raised/(bought back)Dividends paidNet inc/(dec
21、) in borrowingsOther investing/financing cash flowsNet cash flowChange in working capital,27-4230-11-22111,54-549127-30-1114721,73-75-10001035,48-14340006418,79-156400006427,98-197900007931,128,10,11 12EBITDA Margin,13E,14EEBIT Margin,15E,Balance Sheet (USDm)Cash and other liquid assetsTangible fixe
22、d assetsGoodwill/intangible assets,5152,19981,199771,239871,304941,3831051,Growth & Profitability,Associates/investmentsOther assets,26,09,018,021,025,030,100806040,806040,Total assetsInterest bearing debtOther liabilitiesTotal liabilitiesShareholders equity,661383927,21806363155,2950105105190,34801
23、17117230,4240149149275,5180185185333,200,10,11,12,13E,14E,15E,200,MinoritiesTotal shareholders equityNet debt,027-50,0155-199,0190-199,0230-239,0275-304,0333-383,Sales growth (LHS),ROE (RHS),Key Company Metrics,Solvency0-50-100-150,Sales growth (%)DB EPS growth (%)EBITDA Margin (%)EBIT Margin (%)Pay
24、out ratio (%)ROE (%)Capex/sales (%)Capex/depreciation (x),84.9185.925.322.20.072.55.51.8,59.654.626.123.053.926.44.71.5,60.5-11.015.011.70.014.142.013.1,29.437.817.014.357.816.36.02.2,29.327.617.515.10.017.75.02.1,25.026.919.217.00.019.05.02.2,-200,10,11,12,13E,14E,15E,Net debt/equity (%)Net interes
25、t cover (x),-186.6nm,-128.4nm,-104.6nm,-103.9nm,-110.4nm,-115.0nm,Net debt/equity (LHS)Vivian Hao,Net interest cover (RHS),Source: Company data, Deutsche Bank estimates,+852 2203 6241Page 2,,Deutsche Bank AG/Hong Kong,23 January 2013Education ServicesTAL Education GroupKey results takeawaysTop-line
26、headwinds led by slowdown in enrollmentXRS recorded a top line of US$49m in FY3Q13 (+20% YoY), in line with previouscompany guidance and Deutsche Bank estimates, but slightly below Street estimates.We believe this is mainly attributable to slower student enrollment growth of a mere9%, due to 1) the
27、negative impact from the regulatory change on Olympiad-style mathtraining in Beijing, as the company has indicated, and 2) the halt in center openings andscaling back of 1*1 centers, from the peak of 122 LCs in FY2Q12 down to 99 LCs byFY3Q13. In the meantime, ASP growth has remained at 10% YoY.Figur
28、e 1: XRS center opening history180160140120100806040200,3Q11,4Q11,1Q12,2Q12,3Q12,4Q12,1Q13,2Q13,3Q13,Small class,1*1,Source: Company data; Deutsche BankIn August 2012, the Beijing Municipal government banned Olympiad-style mathcompetition scores as an unfair selection criterion in the top middle sch
29、ool admissionprocess; the ban also applies to private tutoring providers with relevant offerings.Although the negative impact of this policy decision remains high in the near term (23quarters), it is likely to fade away over time, as we believe that unless the structuralissue of an insufficient supp
30、ly of quality public education is resolved in China, K-12tutoring on key subjects such as English and math will remain in demand.The learning center network has contracted 6% versus a year ago (275 centers inFY3Q12) under the Harvesting Mode, during which management strategically focusedon operation
31、al efficiency and quality of growth, rather than expansion and market sharegain. We believe the slower pace of center openings also led to the slow enrollmentgrowth in FY3Q13 (9% compared to the 25% and 50% YoY growth recorded in FY2Q13and FY2Q12, respectively), on top of the wallet loss due to the
32、Olympiad-style mathtraining program ban.,Deutsche Bank AG/Hong Kong,Page 3,-,23 January 2013Education ServicesTAL Education GroupSignificant margin improvement due to leverage and efficiencyXRS has largely completed LC rationalization in the past 34 quarters, especially on theless profitable 1*1 cen
33、ters. On the other hand, the tighter control on the learning centernetwork expansion has resulted in substantially improved center utilization, elevatingXRSs margins significantly. Thus XRS recorded a gross profit of US$22m in FY3Q13 vs.the consensus estimate of US$21m (+5%), resulting in a margin o
34、f 45% which is280bps and 430 bps higher than consensus and Deutsche Bank estimates, respectively.Consequently XRS recorded a non-GAAP EBIT of US$4.3m, resulting in a margin of8.8% (+2.4% YoY). This is well above our and Street estimates of a breakeven,seasonally slow quarter, thanks to much lower-th
35、an-expected S&M expenses with thefacilitation of the online segment as a virtual marketing function. Accordingly, XRSsbottom line came in at US$7.4m, which was well above consensus and Deutsche Bankestimates of US$2.9m and US$0.5m, respectively.Figure 2: FY3Q13 results review,Year to 28 Feb,3QFY13,3
36、QFY12A,2QFY13A,3QFY13E,YoY,QoQ,Delta,US$mNet revenuesGross profitsEBIT (GAAP)EBIT (non-GAAP)Net income (GAAP)Net income (non-GAAP),Actual48.922.22.54.35.67.4,Consensus49.621.00.92.9,Variance-1%5%547%160%,Actual40.717.01.22.61.42.9,Actual68.136.216.718.816.018.1,DB est.48.519.9(1.9)(0.1)(1.3)0.5,%20%
37、30%113%66%288%158%,%-28%-39%-85%-77%-65%-59%,%1%12%-228%-4956%-528%1277%,EPADS (GAAP),Diluted,$0.07,$0.01,617%,$0.02,$0.21,-$0.02,288%,-65%,-535%,EPADS (Non GAAP),Diluted,$0.10,$0.04,139%,$0.04,$0.23,$0.01,158%,-59%,1300%,Margin analysis (%),Gross marginEBIT margin (GAAP)EBIT margin (Non-GAAP)Net ma
38、rgin(GAAP)Net margin (Non-GAAP),45.3%5.1%8.8%11.4%15.2%,42.5%1.7%5.8%,2.9%9.7%9.5%,41.8%2.9%6.4%3.5%7.1%,53.2%24.5%27.6%23.6%26.6%,41.0%-4.0%-0.2%-2.7%1.1%,4%2%2%8%8%,-8%-19%-19%-12%-11%,4%9%9%14%14%,Source: Company data, DB estimates, Bloomberg Finance LLPOutlook: expansion to pick up in FY1H14Prud
39、ent expansion strategy, to balance between growth and marginXRS plans to pick up the pace on growth in 1H14, with 30 net new learning centeradditions planned for small class. However, the company intends to remainconservative on 1*1 openings, with no new additions planned for the next six months.Goi
40、ng forward, 1*1 will expand only as a complementary offering to XRSs core smallclass segment rather than on a standalone basis, such that center-doubling growth isunlikely to happen. Furthermore, a sustainable, satisfactory utilization rate (achievementof 80% utilization or more) will continue to be
41、 the key operating goal for the companygoing forward.,Page 4,Deutsche Bank AG/Hong Kong,23 January 2013Education ServicesTAL Education GroupNegative regulatory impact to remain obstinate for another few quartersAccording to management, the negative impact from the banning of Olympiad-stylemath train
42、ing in Beijing has kicked in fully in CY4Q12 and is expected to persist for thenext 2-3 quarters, with relief expected by 3QFY14 onwards. Management also indicatedthat the ban has no impact on its operations in cities other than Beijing, and it willcontinue to offset the negative impact through marg
43、in expansion achieved viaoperational efficiency.Estimate revisionsGiven the near-term pressures imposed by the ban on Olympiad-style math programs inBeijing, coupled with the companys relatively conservative expansion strategy versus aclear margin focus, we revise our earnings estimates as follows:N
44、et revenues: trim on slower enrollment growthReducing by 5.0%/6.5% to US$230m/US$297m for FY13/14E with a moreconservative growth outlook, due to slower student enrollment growthIn line with consensus estimates of US$233m/US$294m, with a marginaldeviation of -1.5%/+0.9% in FY13/14EIndicates a 27.8%
45、3-year FY12-15E CAGR vs. our previous estimate of32.5%Gross profit and margin improve on operating leverageAdjusting by +1.7%/-0.1% to US$114m/US$149m for FY13/14E+3.5%/6.9% vs. consensus estimates of US$110m/US$140mGenerates margins of 49%/50%, +330bps/+320bps vs. previous estimatesof 46%/47%Indica
46、tes a 32.8% 3-year FY12-15E CAGR vs. our previous estimate of36.5%EBIT GAAPIncreasing by 26.8%/13.8% to US$33/US$45m for FY13/14E, given thebetter operating efficiencies of the company, which support significantmargin expansion-5.1%/3.9% vs. consensus estimates of US$35m/US$47mGenerates margins of 14%/15%,+3.6%/2.7% vs. previous estimates of 11%and 12%Indicates a 44.7% 3-year FY12-15E CAGR vs. our previous estimate of47.7%EBIT non-GAAPIncreasing by 20.4%/11.5% to US$41m/US$53m for FY13/14EGenerates margins of 18% vs. our previous estimates of 14% and 15%As a result:,