J.P. 摩根-中国教育行业行业报告：什么比学习更好？-2019.10.17-114页.pdf

Asia Pacific Equity Research17 October 2019 China EducationWhats Better Than Learning?Head of Asia Gaming,Lodging&LeisureDS Kim AC(852)2800-Bloomberg JPMA DSKIM Jeremy An(852)2800-Derek Choi,CPA(852)2800-J.P.Morgan Securities(Asia Pacific)LimitedSee page 110 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,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 We assume coverage of the China education sector,dissecting the industry from different perspectives to arrive at a single conclusion:its still hard not to like the sector,particularly the Big Two,as we see their compounder story is still at(very)early innings.We assume coverage of EDU and TAL and initiate coverage on GSX and Koolearn,with the pecking order:EDU TAL GSX Koolearn.Rare combo of high growth and high visibility.We see a lot to like about the after-school tutoring(AST)industry in China.Demand is non-cyclical and still underpenetrated,suggesting a secular growth outlook.Earnings are highly visible and stable,with margin upside potential.Cash-flow profile is stellar,printing cash returns that are 2-3x of cost of capital.Admittedly,the story may be well-known,but it doesnt make it any less compelling,in our view.Is the future of education online?To answer this most FAQ,we deep dive on online AST,concluding the following:(1)Unit economics is very favorable,with life-time value exceeding acquisition costs by 2-3x;this proves a clear path to profit,as profitability switch can be toggled by slowing student acquisition.(2)Key differentiators are teaching content(now)and technology/data(future),favoring big players who are willing to invest,vs.those focusing on traffic acquisition or present profit.(3)Online ASTs big potential lies in mid/low-tier cities with severe demand/resource gap and less-affluent households,while offline will continue to serve those who can afford and access quality resources i.e.,this is hardly a zero-sum game.We do expect online to enjoy disproportionate growth(+40%CAGR in 18-22E),but the offline market can keep growing at a trend growth of 10%p.a.and have the lions share of AST for longer than many think.We see a multi-year runway for leading companies to grow profitably,by consolidating respective markets and dwarfing peers.EDU/TAL are(still)the best ways to play the story.We see the Big Two as best-positioned now and into the future,offering a long runway of market share gains,backed by clear-cut strategy and strong execution.Interestingly,the two seem to approach the opportunity via different paths:EDU is fortifying offline and focusing on profit,while TAL is taking a leap into online and pursuing growth.Our analysis confirms both as viable strategies,allowing them to build a strong moat in respective areas.We comfortably expect their combined market shares to rise from 6%in 2018 to 12%by 2022E,enabling EDU/TAL to nearly triple/double OP,printing+42%/+31%CAGRs over three years.We like both names,but of the two,we believe EDU offers relative value,stronger profit momentum,and higher visibility.EDUs accelerating profit momentum could also narrow its valuation gap with TAL;we rate EDU as a top pick.Whats the catch?The space isnt cheap;EDU/TAL/GSX trade at 27x/42x/44xCY20E P/E.But we dont see derating drivers,and believe the sectors non-cyclical demand,healthy earnings visibility and stellar cash returns are premium characteristics that justify investors accepting valuation risks.Compoundingpotential underpins our view that this could play out as time corrections strong growth shaving off multiples year after year rather than downside.Detailed valuation works(e.g.,The Rule of 40,reverse DCF,stub value)bolster our confidence,especially for quality names like EDU/TAL.Table 1:JPM Ratings&Price TargetsSource:J.P.Morgan.Prices at close of 16 Oct(EDU,TAL,GSX)and 17 Oct(Koolearn).Rating PT(LC)Upside/(downside)EDUOW143.026%TALOW47.018%GSXN16.013%KoolearnUW11.5(25%)2Asia Pacific Equity Research17 October 2019DS Kim(852)2800- Table of ContentsExecutive Summary.3Why Choose If You Can Have Both?.3Whats So Great About This Business?.5Secularly growing demand,with big consolidation potential.5Highly stable,highly visible.8Cash is beautiful,and they have plenty.9Is Online the Future of Education?.14How big is online market today?.14Before we move on.15Online vs.offline:How do they stack up?.19Wheres the opportunity?.23Who will be the winners?.24Food for thought:Life-time value of a student.28EDU versus TAL.32Valuation Analysis.38Investment Risks.45Appendix:Whos Who in China AST?.47Companies.54New Oriental Education.55TAL Education Group.65GSX.76Koolearn.933Asia Pacific Equity Research17 October 2019DS Kim(852)2800- Executive SummaryWhy Choose If You Can Have Both?We see a lot to like about the after-school tutoring industry in China1.Demand is non-cyclical,growth shows secular trends,earnings are stable&visible,and the cash-flow profile is stellar,in our view.In particular,we believe the Big Two(EDU&TAL)are best-positioned to succeed now and into the future,with a long runway of market share opportunity,backed by well thought-out strategy and best-in-class executions.All this might be well-known,but it still makes a very compelling story however we slice it(see P5-13 for our birds eye analysis of industry dynamics).Granted,these stocks arent cheap,but we are more sanguine,taking the view that high potential stocks are rarely cheap.We believe investors should be willing to pay up to ride the compounding engine from this secular growth,which in turn will shave off multiples fast and generate multi-year returns.We believe current prices will have seemed a great entry point in hindsight a view that is supported by hindsight today on their share price performances over a year,two,or three years ago.Detailed valuation analysis(e.g.,a reverse DCF,The Rule of 40,or stub value;P38-44)suggests that valuation concerns are overdone,and that these stocks are surprisingly affordable when viewed in the light of visibility and quality of earnings.More often than not,investors also ask,“Then which camp are you in?EDU orTAL?”We respond:“Why not have both if we can?”We think this is particularly true at this juncture,as the two companies seemingly diverged on strategic direction,trying to seize opportunity via different paths:EDU fortifying its offline and focusing on profit,while TAL has taken a leap into online and pursuing growth(See P32-37 for our thoughts on EDU vs.TAL).Our in-depth analysis on online vs.offline ASTs(such as unit-economics,serviceable addressable market,product efficacy,etc.;P14-31)suggests online will surely enjoy disproportionate growth,but offline can take the lions shares of China AST for longer than many think.We identify two key winners EDU for offline and TAL for online who can build a strong moat in respective areas,in turn growing secularly for many years.What are the risks?Besides the usual(e.g.,policy risk,risks on corporate/listing structure,FX,etc.),any meaningful slowdown in growth or decay in earnings visibility could drive fast de-rating of valuations.That said,neither seems likely at this point,especially for the quality names like EDU/TAL,in our view.We do have stock preferences given our investment horizon(Dec-2020 price targets),though it may not necessarily reflect our long-term views on the companies.Our pecking-order is EDU(OW)TAL(OW)GSX(N)Koolearn(UW)(see individual company pages for detailed discussion on each stock).1Our discussion of industry throughout this report refers to the K-12 after-school tutoring,i.e.,non-formal private companies that provide teaching of core subjects(e.g.,English,math,Chinese,etc.)for Kindergarten Grade 12 students.This doesnt include overseas consulting and other test-prep businesses(such as TOEFL,GMAT,CET etc.),which account for about 32%/11%of EDU/TALs revenues.4Asia Pacific Equity Research17 October 2019DS Kim(852)2800- New Oriental(EDU US):OW,with a PT of$143(+26%potential upside).EDU is our top-pick,which we see as in the early innings of a substantial profit upcycle,for which the stock looks affordable.We comfortably forecast EDUs OP to triple in three years;key driver will be margin,as a higher mix of matured centers,rising utilization,and alleviating offline competition will push up OPM to 17%by FY22E(vs.12%in FY19)on JPMe.Some investors seem concernedabout its(very)long term as EDU has seemingly given up on online for now.Not us we say EDU can and will build a strong moat in offline AST,which will have the lions share of AST and grow secularly for longer than many think.TAL Education(TAL US):OW,with a PT of$47(+18%potential upside).We do think TAL offers the most definable long-term outlook,fueled by super-normal growth in online(which we estimate to print 80%CAGR and account for 40%of revenue in three years),and its best-in-class execution and proven track record give us lots of comfort.That said,we,as a sell-side,cant help but think about near-term earnings and valuations.Given transitory pressure from online,we expect TALs margin can start to recover only from FY23E,until which time its profit momentum will inevitably trail EDUs.This,plus its valuation premium over EDU(50%on headline P/E,or 20%+on stub P/E ex-online),lead us to place it as our 2nd preferred stock for now.GSX(GSX US):N,with a PT of$16(+13%potential upside).GSX is probably the most debatable yet interesting name in the sector,we think.On one hand,the numbers thus far look amazing,growing top-line at 500%+while printing the highest OPM in online education thanks to its star-teacher strategy and viral marketing,enabling better scalability of teachers and higher ROI on marketing.On the other hand,however,the sustainability of strategy is highly debatable,given severe concentration risk(nearly half of sales come from Top 10 teachers)and yet-to-be-proven ability to cultivate another troop of star teachers.Were not saying its impossible,but it seems a challenging task.Given limited history,we dont have confidence to make a call and rate the stock as Neutral better safe than sorry,we thought.For short-term investors,we see GSX as a good trading stock into near-term results,where we expect sustained and above-guidance momentum.Koolearn(1797 HK):UW,with a PT of HK$11.5(-25%potential downside).Simply put,we struggle to find a path for it to make good profits in theforeseeable future.We appreciate niche-market potential of its unique small-group product(DFUB)that can cater to relatively affluent households in(very)low-tier cities,with superior quality than other available options;but the product is hardly scalable and penetration is likely slow,as per our analysis,leaving questions on its profitability.Meanwhile,its large-group offering is unlikely to gain strong momentum given late-comer disadvantage and lack of competitive edge.All-in,we expect Koolearn can turn profitable only by FY2023E,with less-than-stellar top-line growth for online pure-play;thus we rate the stock UW.Table 2:China AST:Valuation comparison(prices as of 16 October 2019)*Note:Profits are non-GAAP based,excluding share-based comps.GSX and Koolearns YTD share performances are calculated from listing prices.Source:Company data,J.P.Morgan estimatesJPMPTPriceMkt cap 3m ADTStock perf(%)P/E(x)*PEG(x)TickerCompanyRating(LC)(LC)(US$b)(US$m)3-moYTD*1-year CY20E CY21E CY22E 19-21E CY20E CY21E CY20E CY21E CY20E CY21E CY22EEDU USNew OrientalOW143.0113.718.012518%107%77%27.120.015.41.017.712.03.12.236%36%30%TAL USTALOW47.040.023.710310%49%65%42.030.422.01.528.820.74.73.439%38%39%GSX USGSXN16.014.13.315.540%34%n.a.44.029.819.61.230.418.34.83.1159%48%52%1797 HKKoolearnUW11.515.01.83.046%47%n.a.n.m.n.m.68.3n.m.n.m.11365.6 4.0 n.m.n.m.n.m.EV/Sales(x)EV/EBITDA(x)*EPS growth*5Asia Pacific Equity Research17 October 2019DS Kim(852)2800- Whats So Great About This Business?Secularly growing demand,with big consolidation potentialFigure 1:China AST:K12 market size(based on revenue)Source:Frost&Sullivan,J.P.Morgan estimatesChinas K-12 AST market is huge and is only going to get bigger,in our view.Structural tailwinds that helped the industry to double in size since 2013(+12%CAGR to RMB508B in 2019E,according to Frost&Sullivan)remain intact,namely rising income,cultural obsession to get into top schools,and strong propensity to spend money on education.Simply put,demand for AST will remain intact due to deeply-rooted cultural aspects,as long as the competitive and test-based nature of Chinese education system remains in place.Frankly,the industry analysis may not even seem necessary,as the market has been growing at an almost boringly steady+12-13%p.a.with no big fluctuation(except 2018,which was impacted by one-off regulatory changes).This was led by gradually rising penetration and prices(Figure 2-3),while the number of K-12 students remained steady;we dont see why or how the trend will change materially,considering the penetration is still well below some other Asian countries(such as Korea or Japan,where penetrations are north of 50%;Figure 4).Structural,steady,and non-cyclical growth should remain intact for many years,in our view.Figure 2:K-12 AST revenue growth breakdown(offline only)Source:Frost&Sullivan,J.P.Morgan estimates Figure 3:K-12 AST penetration in China(offline only)Source:NBS,Frost&Sullivan203228255285318354393426466 2072332612933283704154565080%2%4%6%8%10%12%14%0100200300400500600201120122013201420152016201720182019ERmb BOfflineOnlineY/Y growth(RHS)9%9%9%9%9%8%5%6%3%3%3%3%2%3%3%3%+12%+12%+12%+12%+11%+11%+8%+9%0%2%4%6%8%10%12%14%20122013201420152016201720182019EOffline ASP Y/YStudent enrollment Y/Y50 51 535456575924.1%25.5%26.0%26.3%26.4%26.6%26.8%22.0%23.0%24.0%25.0%26.0%27.0%28.0%44 46 48 50 52 54 56 58 602012201320142015201620172018Students enrollments(mn people)Penetration(%,RHS)6Asia Pacific Equity Research17 October 2019DS Kim(852)2800- Figure 4:K12 AST penetration(based on student enrollment)Source:Frost&Sullivan,J.P.Morgan estimates.Note:China penetration rate is based on student enrollment data in 2018;Japan penetration is based on NIER research 2015;Korea penetration is based on KOSIS research 2015.Figure 5:China Education systemSource:TAL,J.P.MorganThis should already sound attractive for many investors.But the real beauty of the industry,in our view,lies in its huge potential for consolidation.According to various industry figures,there are around half a million AST institutions across China,over 90%of which generate less than RMB10m in annual revenue,and the Big Two companies have less than 6%market shares(or 67%even including No 3).The fragmentation is even more severe in lower-tier cities,where the Big Players have faced two stumbling blocks lower inco