中国在线教育行业报告

1、Why read this report?After-school tutoring in China is being driven by rising pressure on children to succeed academically; we see TAL and EDU as the most defensive China growth stocks amid tradetensionsOnline education offers students in smaller cities greater opportunities, and for education provi

2、ders, scalability; online investment will translate into more sustainable long-termgrowthWe initiate on the two market leaders, TAL and EDU, with Buy ratings; we prefer TAL due to the faster ramp-up of online business and earnings recoveryaheadBinnie Wong*Head of Internet Research, Asia PacificThe H

3、ongkong and Shanghai Banking Corporation Limited HYPERLINK mailto:binnie.wong.hk binnie.wong.hk+852 282 22590* Employed by a non-US affiliate of HSBC Securities(USA)Inc,andisnotregistered/ qualified pursuant to FINRAregulationsTop marksInvestors in search of a strong domestic growth story in China w

4、ith no exposure to fractious international trade relations should look no further than the countrys thriving after-school tutoring market. Education is a powerful cultural force, as illustrated by the strong desire of manyparentsfortheirsonordaughter toexcelinthefearedgaokao, thecollegeentranceexam

5、that determines which university you go to. And despite efforts by the government to reduce academic pressure on stressed out pupils, demand for extra classes continues togrow.Its easy to see University rates in are than in the US and the penetrationratesoftutoringremainfarbelowotherAsianeducationsu

6、chasHongandSouthInthisthishighlyindustryidentify the forces that give the next push. of the most is huge appetite for in cities and rural access to quality teaching is often limited. Online classes are good for revenues, too, as they can cater for as many as 1,000 students simultaneously, far more t

7、han traditional courses in classrooms. The charts on the following two pages illustrate what we believe is a compelling growthstory.We initiate coverage of the two largest after-school tutoring operators in China, TAL Education Group (TAL) and New Oriental Education (EDU). Over FY19-22e we forecast

8、a 33% revenue CAGR for TAL and 23% for EDU, as TALs online model has a better growth trajectory.Although competition is increasing online giants such as Bytedance, Tencent, Baidu and NetEase have entered the market we believe TAL and EDU are well equipped to maintain their leadership positions due t

9、o their industry know-how and brand strength.As in many other industries in China, we see tighter regulation as the main risk. Indeed, in the made by the government. However, in the long term we think tighter regulation will only serve to increase the market share of industry leaders like TAL and ED

10、U as the sector consolidates.Focus chartsExhibit 1: K12 AST market to grow from RMB558bn in 2019e to RMB675bn in 2021e at 10% CAGR2015201620172018e2019e2020e2021e2022eChina K12 after school education market size by gross billing373415458506558614675740y-o-y13%11%11%10%10%10%10%10%High school12914115

11、3166178191205219y-o-y10%9%9%8%7%7%7%7% of K12 gross billings35%34%33%33%32%31%30%30%Middle school121134146160174189204220y-o-y11%10%9%9%9%9%8%8% of K12 gross billings33%32%32%32%31%31%30%30%Primary school113130147167190215244276y-o-y17%14%13%14%14%13%13%13% of K12 gross billings30%31%32%33%34%35%36%

12、37%Pre-school1011131417192226y-o-y16%14%16%15%15%16%16%15% of K12 gross billingsSource: Frost & Sullivan3%3%3%3%3%3%3%3%Exhibit 2: thanks to Chinas rising K12 tutoring penetration rate29%28%28%28%27%26%29%29%28%28%28%27%26%29%28%28%27%27%26%26%25%201620172018e 2019e 2020e 2021eExhibit 3: and ample u

13、pside potential given the large gap between China and other Asian countriesTutoring penetration rate in 2018 (%)81%82%28%50%51%Tutoring penetration rate in 2018 (%)81%82%28%50%51%80%70%60%50%40%30%20%10%0%Total K12 tutoring penetration rate, ChinaSource: Frost&SullivanSource: Frost &SullivanChinaTie

14、r 1 cities ChinaJapanSouthHKKoreaExhibit 4: and low university acceptance rate drives demand for tutoringExhibit 5: and strong online AST momentum: 27% CAGR over 2019-22e4-yearuniversityacceptanceratein201724%56%24%80604020-50%11241%40%34%9131%735725%28%23%44322340%11241%40%34%9131%735725%28%23%4432

15、2330%20%10%0%US 4-year acceptance rateChina 4-year universityacceptance rate2016 2017 2018e 2019e 2020e 2021e 2022eChinaonlineASTmarketsize(RMBbn)yoySource: Frost&SullivanSource: Frost &SullivanExhibit 6: The industry is very fragmented leaders TAL and EDU have only 3% and 2% market share by revenue

16、TAL (3.1%), EDU (2.2% ),Exhibit 7: but the market is consolidating due to tighter regulationTAL (3.1%)EDU (2.2% )Onesmart() (0.6%)Puxin() (0.4%)OnlyEducation() (0.4%)ChinaOnlineEducation()(0.2 RiseEducation() (0.3 %) Koolearn (0.1%)FourSeasonsEducation() (0.1 Others (92.6%)3.1%Others %)2.2%32%68% of

17、 AST institutions not compliant with regulations32%68% of qualified AST institutionsSource: Frost & Sullivan,company dataSource: Frost & Sullivan, company data,HSBCExhibit 8: TAL and EDUs low student acquisition costs are underpinned by their quality education services and brand strength38%35%22%20%

18、15%12%28%22%17%24%18%13%12%26%21%13%14%38%35%22%20%15%12%28%22%17%24%18%13%12%26%21%13%14%21%20%19%13%12%19%12%12%12%12%S&M expense as % of revenue30%20%10%0%FY15FY16FY17FY18EFY19EFY20EFY21EEDUTALOnesmartOnlyEducationSource: Company data, HSBC estimates. Note: TALs fiscal year-end is in February, an

19、d EDUs is in May.Exhibit 9: We estimate TAL and EDU will nearly double their market share in three yearsChina K12 AST market share by revenue100%80%91%92%94%60%91%92%94%98%97%96%95%98%97%96%95%40%1%1%1% 1%1%1%2016TAL1% 2%1%2%20172% 2%2%2%EDU3%3%3%3%3%3%4%2020eOthers3%3%5%2021eSource: Frost & Sulliva

20、n, company data, HSBC estimatesContents HYPERLINK l _bookmark0 Why readthisreport?1 HYPERLINK l _bookmark1 Online tutoring in China HYPERLINK l _bookmark1 smart move5 HYPERLINK l _bookmark2 Relatedresearch6 HYPERLINK l _bookmark3 Universitychallenge7 HYPERLINK l _bookmark4 Welcome to Chinas giant HY

21、PERLINK l _bookmark4 after-schooltutoringindustry13 HYPERLINK l _bookmark5 Companysection31 HYPERLINK l _bookmark6 TAL Education(TALUS)32 HYPERLINK l _bookmark7 New Oriental Education(EDU US)57 HYPERLINK l _bookmark8 Appendix74 HYPERLINK l _bookmark9 Disclosureappendix80 HYPERLINK l _bookmark10 Disc

22、laimer84Online tutoring in China smart moveLower-tier cities account for the majority of revenue in the after-school tutoring market in ChinaLower-tier cities account for the majority of revenue in the K12 after-school tutoring (AST) market in ChinaMarket size by city tier (2017)Through live-streami

23、ng, top-rated teachers in Beijing and Shanghai can teach thousands of students in lower-tier cities simultaneously, offering better marginsOnline tutorial market value (RMB)80%Tier 3 citiesand belowTier 2 cities7%Tier 1 cities27%80%Tier 3 citiesand belowTier 2 cities7%Tier 1 cities201844bn112bn2022e

24、44bn112bnTotal China AST market value (RMB) 558bn740bn2019e2022eTighter regulation is accelerating the pace of industry consolidation, which should help TAL Education (TAL) and New Oriental Education (EDU) increase their market shareTAL and EDU are the largest after-school tutoring by market shareEn

25、rolment and revenue CAGR FY19-22eOnline model helps TAL enhance operating efficiency92.6%Others%TALEnrolment2.2% EDU0.6%0.4%0.4%0.3%0.2%2.2% EDU0.6%0.4%0.4%0.3%0.2%56%TAL33%TAL22%EDU23%EDURevenueCAGREnrolments per sq.m in FY1910.4TAL10.4Note: Other listcos include China Online Education, Four Season

26、s Education, RISE, Koolearn Note: We use TAL FY19 revenue and EDU FY18 revenue for charting purposes.Sources: iResearch, Frost & Sullivan, company data, World Bank, HSBC estimates3.4EDUNote: Other listcos include China Online Education, Four Seasons Education, RISE, Koolearn Note: We use TAL FY19 re

27、venue and EDU FY18 revenue for charting purposes.Sources: iResearch, Frost & Sullivan, company data, World Bank, HSBC estimates3.4Related researchRecommended reading. HYPERLINK /R/10/XzVGM6MsDNKw ChinaonlinetravelFriendorfoeInitiateBuyonCtripand14May2019 HYPERLINK /R/20/PgzQV7WvQsPK ChinaInternetadv

28、ertisingWhatandnewplayersmeanforthefutureof online 13 Dec2018 HYPERLINK /R/10/BcsdwpGsDNKw Tencent Look at the picture, 31 Jan2019University challengeThe pressure on children to succeed academically is driving the relentless expansion of the market for after-school tutoring inChinaOnline services ar

29、e providing greater access to education for students in smaller cities, providing the next leg of industrygrowthAs the government tightens regulations, we believe the two market leaders, TAL and EDU, are well placed to grow their marketshareNever too young to learnNot surprisingly, Chinas after-scho

30、ol tutoring market is thrivingThere are about 220m school children in China and we estimate 61m of them attend extra lessons at after-school tutoring institutions. Some of these establishments are very grand, other are more humble. But the goal is the same all over the country to do well in the gaok

31、ao, the life-defining college entrance exam which determines where (and if) you go to university. The stakes are high, and the pressure is enormous.The government, concerned about the academic burden these children face, has moved to ease these pressures by cutting the class hours in state schools,

32、reducing the amount of homework and downplaying the importance of exam scores. The response? An ever-growing number of ambitious parents are paying for their children to attend extra classes after school to help them make the grade.Not surprisingly, Chinas after-school tutoring market is thriving. A

33、side from ambitious parents and the role that education plays in Chinese culture, there are plenty of other forces driving growth. The K12 population shorthand for children of school age is growing, disposable income is increasing and new technology has increased the availability of online tutorials

34、 which can tap into a huge new market in smaller cities and rural areas. According to consultants Frost & Sullivan, the countrys after-school tutoring market will be worth RMB558bn in 2019e (about USD80bn) and it is expected to grow at a CAGR of 10% to reach RMB740bn in 2022.This report initiates co

35、verage on the two largest after-school tutoring operators in China, TAL Education Group (TAL) and New Oriental Education (EDU). TAL is the largest K12 after-school tutoring company, with a 3% market share based on 2018 revenue. It leads the industry with a strong offline network, quality education s

36、ervices backed by self-developed curriculum and years of experience developing online high-tech online courses. EDU is more diversified, offering after-school classes as well as adult language courses, preparation for overseas tests and vocational training. It has a market share of about 2%.Although

37、 competition in online education is increasing a number of online giants such as Bytedance, Tencent, Baidu and NetEase have entered the market we believe TAL and EDU are well-equipped to maintain their leadership positions. Yes, the internet companies have abundant capital to compete for quality tea

38、chers, invest in marketing and offer competitive pricing to attract users. However, when it comes to education, parents are less price-sensitive and more results oriented. EDU and TAL are strong brands with competitive advantages such as years of experience, good teacher training and standardised co

39、ntent which are hard to replicate quickly. This has led to high retention rates and strong pricing power.EDU has been in business for 26 years and TAL for 16Our USD40 target price TAL implies 22%upsideOur USD117 target price EDU implies 12%upsideEDU has been in business for 26 years and TAL for 16.

40、This has allowed them to accumulate considerable amounts of big data. For example, EDU has a database with over 10m questionnaires with detailed teacher and student feedback. This helps EDUs teachers to better understand students learning patterns, contributes to curriculum development and eventuall

41、y improve results.Fragmented market to consolidate due to tougher regulationThere are several hundred thousand after-school tutorial operators in China. As mentioned, the two market leaders have only a 5% share of the revenue between them. The government, having first tried to ease the academic burd

42、en on pupils at schools, has now turned its attention to the tutoring market. It wants to raise operation standards and the quality of teaching and prevent student burnout. In February 2018, a series of new regulations were introduced which resulted in higher operating expenses and the risk of teach

43、er shortages. This has squeezed out smaller, lower-quality operators, while market leaders like TAL and EDU have greater resources which allows them to comply with the new regulations. In our view, TAL and EDU will increase their market share as the industry consolidates.Why we prefer TAL to EDUWe i

44、nitiate on TAL with a Buy rating and a DCF-based target price of USD40, implying 22% upside. TAL is the largest K12 after-school tutoring company in China with c3% market share based on 2018 revenue. The company provides tutoring in all subjects through offline small classes (Peiyou, mainly 培优), its

45、 website (X 学而思网校) and one-on-one class (Aizhikang 爱智康) format. We estimate a 33% revenue and 29% non-GAAP net income CAGR during FY19-22e. We see this being supported by strong sector growth, market share gains and the increasing contribution from the online segment. We believe the online business

46、run through the X website will be a game-changer for TAL. We expect online revenue to grow from USD343m in 2019e to USD2.448bn in 2021e, a CAGR of 93%, as the number of studentsenrolling in full-price online courses increases from 2m in 2019e to 20m in 2020e. This would take the share of revenue of

47、the online business from 13% to 41%. Our non-GAAP profit estimates are 7%/8%/2% above Bloomberg consensus in FY20e-FY22e.We initiate on EDU with a Buy rating and a DCF-based target price of USD117, implying 12%upside. EDU is more diversified New Oriental (新东) offers overseas/domestic tests/adult lan

48、guage/vocational training; POP Kids (泡泡少教育) for 5-12 year-old after-school tutoring, and U-Can (优能中学教育) for 12-18 year-old after-school tutoring. It also operates onlineplatforms Koolearn ( 新 东 在 线 ) and DFUB ( 东 方 优 播 ) for overseas studies/test preparation/language learning and after-school tutori

49、ng. We estimate that the online business,which has a bigger addressable market, only contributes c5% of total revenue in FY19. We forecast 23% revenue CAGR for EDU for during FY19-22e, driven by 28% revenue CAGR in its K12 segment but dragged down by slower test preparation growth (c8% CAGR). Thanks

50、 to an improving offline utilisation rate, stringent cost control and absence of one-off investment losses, we believe EDUs margins are likely to improve and contribute to its 42% non-GAAP net income CAGR duringFY19-22e.Although we like both companies, we prefer TAL due to its greater exposure to on

51、line after- school tutoring and strong focus on the K12 market. We believe this provides a better growth trajectory, as EDUs top-line growth had been slowed by its overseas test preparation business. More importantly, though TALs online investment will impair its margin in the short term, we believe

52、 this is only temporary and will translate into better scale and operating efficiency in thefuture. Lastly, TALs stock price declined by approximately 13% after its 1QFY20 results due to weak margin guidance, which we think creates a buying opportunity given its compelling domestic long-term growth

53、story.Key driversThe key share price drivers of these companies which we explore in detail in the company write-up are, for TAL: 1) standardisation; 2) dual-teacher model ramp-up; 3) online business growth; and 4) margin expansion, while for EDU we think the key drivers are: 1) offline enrolment gro

54、wth; 2) cross-selling opportunities; and 3) margin recovery.Strategic investments and M&A opportunitiesTAL and EDU favour strategic investments rather than acquiring direct competitorsThe stock prices of TAL and EDU are highly related to regulation changesTAL and EDU have both been active investors

55、in order to identify new opportunities to complement their current operations and drive long-term growth. Based on past records and our discussions with management, we believe they prefer strategic investment over M&A. The main reason is that most small education companies are at the development sta

56、ge and are yet to mature operationally and financially. This makes it difficult to develop or integrate companies after M&A is complete.Although TAL and EDU have different investment appetites, they both aim to complement their present services rather than invest in a peer company with a similar mod

57、el. One reason for this is the incremental cost of making changes to bring the new company up to their standards.According to their earlier investment records, both TAL and EDU have invested heavily in education IT systems and AI technology. This strategy is in line with their efforts to improve tea

58、ching quality and develop online education.Another popular area of investment is related to K12 STEAM science, technology, engineering, arts and math a programme which is being encouraged by the government to cultivate well-rounded individuals instead of ace test takers. TAL also focuses on educatio

59、n- related community forums and pre-school early education, while EDU prefers adult education companies to create synergies with its domestic/overseas test preparation segment.Please see the Appendix at the back of this report for detailed tables showing the lists of entities that TAL and EDU have i

60、nvested in.Why the stocks have reboundedIn the past year, the share prices of both companies have been volatile, largely due to government announcements about regulation. On 22 August 2018, the government released a policy entitled “Opinion to Regulate After-School Tutoring Development (国务院办公厅关于规范校外