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China Tutoring Education Sector - Industry leaders captures massive tutoring market trend growth driven by deep belief in “Matthew Effect”

作者: Tommy WONG,Crystal LI
时间: 2019年06月21日
重要性: 一般报告
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摘要: Report title:China Tutoring Education Sector - Industry leaders captures massive tutoring market trend growth driven by deep belief in “Matthew Effect”
Analyst:Tommy WONG,Crystal LI
Report type:Industry
Date:20190621
[Summary]

■ OVERWEIGHT China K12 tutoring market for its large scale, rapid trend growth, and industry consolidation trend.
■ A structural growth sector, some short term risks exist but unlikely to derail long term trend growth.
■ Initiate BUY: TAL (TAL US) and New Oriental Education (EDU US)
Matthew Effect drives spending by parents to give children an edge in their education journey
K12 tutoring market, despite its size, has much growth left, given expected rising tutoring participation rate, even in seemingly mature tier 1 markets, and more upside from lower tier cities. Concentration is low with TAL and New Oriental only holding an estimated 3% of the market, leaving plenty of upside. Competitive advantage drivers for New Oriental and TAL are: 1) Share gain, leveraging capital and scale advantages which support offline expansion, technology, and online business development; 2) National brand recognition and reputation that are received by parents, overall forming a virtuous cycle with greater scale and service differentiation; 3) Tightened regulatory requirements which push out small, disorganized players and therefore benefit education groups.
Long term growth trend shaping up
Tutoring sector has been on a roller–coaster ride in the past 12 months, and TAL and New Oriental have increased by 77%/85% from trough. We see more upside given our view of favourable fundamentals. Potential concerns we see that could present buying opportunity: 1) Regulation risk: promotion for private education (民促法送审稿) has not been finalized. 2) Market risk: trade war/slowing economy - our study found limited impact from previous economy weaknesses (i.e. 2007-08 Great Recession, 2015 China Market Plunge etc.) to tutoring market growth trend. We characterize the tutoring market demand growth as relatively inelastic / defensive, and long term growth is unlikely to be derailed, save for a drastic economic downturn.
BUY: EDU, TAL: Not that expensive given growth
We are positive on New Oriental and TAL for their strong brands, solid fundamentals, competition advantages and potential valuation upside. For TAL, our target price is set at US$46.1 (21% upside), based on 45x P/E and next 12-mo EPADS, implying 52x/35x FY20E/FY21E P/E. For New Oriental, our target price is set at US$117.3 (26% upside), based on 32x P/E and next 12-mo EPADS, implying 33x/25x FY20E/21E P/E. Key downside risks: 1) Unfavourable regulations 2) Larger than expected operating expenses in, for example, online marketing/promotion 3) Reputational risk.

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