汇丰银行-中国在线教育行业报告-2019.8-87页.pdf

Disclosures&Disclaimer:This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it.Play interview withBinnie WongEquitiesHong Kong/ChinaAugust 2019By:Binnie WongChina EducationWhat regulations and online education meanfor the future of China after-school tutoringAfter-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 trade tensions Online education offers students in smaller cities greater opportunities,and for education providers,scalability;online investment will translate into more sustainable long-term growthWe 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 recovery aheadSP OTLIGHT 1 Equities Hong Kong/China August 2019 Top marks Investors in search of a strong domestic growth story in China with 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 many parents for their son or daughter to excel in the feared gaokao,the college entrance exam 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 to grow.Its easy to see why.University acceptance rates in China are lower than in the US and the penetration rates of after-school tutoring(AST)remain far below other Asian education hothouses such as Hong Kong and South Korea.In this report we explore this highly fragmented industry and identify the powerful forces that will give growth the next push.One of the most important is the huge appetite for online courses in smaller cities and rural areas,where 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 than traditional courses in classrooms.The charts on the following two pages illustrate what we believe is a compelling growth story.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 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 to 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 last year the share prices of both companies have been highly sensitive to regulatory announcements 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 EDU as the sector consolidates.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 trade tensions Online education offers students in smaller cities greater opportunities,and for education providers,scalability;online investment will translate into more sustainable long-term growth We 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 recovery ahead Binnie Wong*Head of Internet Research,Asia Pacific The Hongkong and Shanghai Banking Corporation Limited .hk+852 282 22590 *Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulations THIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLES REPUBLIC OF CHINA(THE PRC)(EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)Equities Hong Kong/China August 2019 2 Focus charts Exhibit 2:thanks to Chinas rising K12 tutoring penetration rate Exhibit 3:and ample upside potential given the large gap between China and other Asian countries Source:Frost&Sullivan Source:Frost&Sullivan Exhibit 4:and low university acceptance rate drives demand for tutoring Exhibit 5:and strong online AST momentum:27%CAGR over 2019-22e Source:Frost&Sullivan Source:Frost&Sullivan 26%27%28%28%28%29%25%26%26%27%27%28%28%29%29%201620172018e2019e2020e2021eTotal K12 tutoring penetration rate,China28%50%51%81%82%0%10%20%30%40%50%60%70%80%90%ChinaTier 1cities inChinaJapanSouthKoreaHKTutoring penetration rate in 2018(%)56%24%0%10%20%30%40%50%60%US 4-year universityacceptance rateChina 4-year universityacceptance rate4-year university acceptance rate in 201723 32 44 57 73 91 112 41%40%34%31%28%25%23%0%10%20%30%40%50%-20 40 60 80 100 1202016 2017 2018e 2019e 2020e 2021e 2022eChina online AST market size(RMBbn)yoyExhibit 1:K12 AST market to grow from RMB558bn in 2019e to RMB675bn in 2021e at 10%CAGR 2015 2016 2017 2018e 2019e 2020e 2021e 2022e China K12 after school education market size by gross billing 373 415 458 506 558 614 675 740 y-o-y 13%11%11%10%10%10%10%10%High school 129 141 153 166 178 191 205 219 y-o-y 10%9%9%8%7%7%7%7%of K12 gross billings 35%34%33%33%32%31%30%30%Middle school 121 134 146 160 174 189 204 220 y-o-y 11%10%9%9%9%9%8%8%of K12 gross billings 33%32%32%32%31%31%30%30%Primary school 113 130 147 167 190 215 244 276 y-o-y 17%14%13%14%14%13%13%13%of K12 gross billings 30%31%32%33%34%35%36%37%Pre-school 10 11 13 14 17 19 22 26 y-o-y 16%14%16%15%15%16%16%15%of K12 gross billings 3%3%3%3%3%3%3%3%Source:Frost&Sullivan 3 Equities Hong Kong/China August 2019 Exhibit 6:The industry is very fragmented leaders TAL and EDU have only 3%and 2%market share by revenue Exhibit 7:but the market is consolidating due to tighter regulation Source:Frost&Sullivan,company data Source:Frost&Sullivan,company data,HSBC Exhibit 8:TAL and EDUs low student acquisition costs are underpinned by their quality education services and brand strength Source:Company data,HSBC estimates.Note:TALs fiscal year-end is in February,and EDUs is in May.Exhibit 9:We estimate TAL and EDU will nearly double their market share in three years Source:Frost&Sullivan,company data,HSBC estimates TAL(3.1%),3.1%EDU(2.2%),2.2%Others(92.6%)TAL(3.1%)EDU(2.2%)Onesmart()(0.6%)Puxin()(0.4%)Only Education()(0.4%)China Online Education()(0.2%)Rise Education()(0.3%)Koolearn(0.1%)Four Seasons Education()(0.1%)Others(92.6%)68%32%of AST institutions notcompliant withregulations%of qualified ASTinstitutions15%13%13%13%12%12%12%12%12%12%12%14%19%21%20%19%22%17%18%21%20%22%24%26%28%35%38%0%10%20%30%40%FY15FY16FY17FY18EFY19EFY20EFY21EFY22ES&M expense as%of revenueEDUTALOnesmartOnly EducationPuxin1%1%2%3%4%5%5%1%1%2%2%3%3%3%98%97%96%95%94%92%91%0%20%40%60%80%100%2015201620172018e2019e2020e2021eChina K12 AST market share by revenueTALEDUOthers Equities Hong Kong/China August 2019 4 Why read this report?1 Online tutoring in China smart move 5 Related research 6 University challenge 7 Welcome to Chinas giant after-school tutoring industry 13 Company section 31 TAL Education(TAL US)32 New Oriental Education(EDU US)57 Appendix 74 Disclosure appendix 80 Disclaimer 84 Contents 5 Equities Hong Kong/China August 2019 Online tutoring in China smart move Note:Other listcos include China Online Education,Four Seasons 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 estimates Lower-tier cities account for the majority of revenue in the after-school tutoring market in ChinaTighter regulation is accelerating the pace of industry consolidation,which should helpTAL Education(TAL)and New Oriental Education(EDU)increase their market share3.1%TAL2.2%EDU0.6%0.4%0.4%0.2%0.1%0.1%0.3%80%Lower-tier cities account for the majority ofrevenue in the K12 after-school tutoring(AST)market in ChinaMarket size by city tier(2017)Online tutorial market value(RMB)Total China AST market value(RMB)TAL and EDU are the largest after-schooltutoring by market shareOnline model helps TAL enhanceoperating efficiencyEnrolment and revenueCAGR FY19-22eTier 3 citiesand below13%Tier 2 cities7%Tier 1 cities92.6%OthersEnrolmentCAGRRevenueCAGRTALEDUEnrolments per sq.m in FY1956%TAL33%TAL22%EDU23%EDU10.43.4Through live-streaming,top-rated teachersin Beijing and Shanghai can teachthousands of students in lower-tier citiessimultaneously,offering better margins20182022e2019e2022e558bn44bn740bn112bn27%CAGRc10%CAGR Equities Hong Kong/China August 2019 6 Related research Recommended reading.China online travel Friend or foe Initiate Buy on Ctrip and Tongcheng-Elong,14 May 2019 China Internet advertising What slower growth and new players mean for the future of online advertising,13 Dec 2018 Tencent Look at the bigger,broader,connected picture,31 Jan 2019 7 Equities Hong Kong/China August 2019 Never too young to learn There 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 gaokao,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,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.Aside 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 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 coverage 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 services 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 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 teachers,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 content which are hard to replicate quickly.This has led to high retention rates and strong pricing power.University challenge The pressure on children to succeed academically is driving the relentless expansion of the market for after-school tutoring in China Online services are providing greater access to education for students in smaller cities,providing the next leg of industry growth As the government tightens regulations,we believe the two market leaders,TAL and EDU,are well placed to grow their market share Not surprisingly,Chinas after-school tutoring market is thriving Equities Hong Kong/China August 2019 8 EDU has been in business for 26 years and TAL for 16.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 eventually improve results.Fragmented market to consolidate due to tougher regulation There 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 burden 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 teacher 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 EDU We initiate 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 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 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 students enrolling in full-price online courses increases from 2m in 2019e to 20m in 2020e.This would take the share of revenue of 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 language/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 online platforms Koolearn(新东在线)and DFUB(东方优播)for overseas studies/test preparation/language learning and