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2 April 2019
Asia Pacific/China
Equity Research
Education Services
China K12 Tutoring Sector
SECTOR FORECAST
Research Analysts
Thomas Chong
852 2101 6164
thomas.chong@credit-suisse.com
Alex Xie
852 2101 7462
alex.xie@credit-suisse.com
Modeling offline regulation impact and
potential from online education
Figure 1: We expect EDU and TAL to take more market shares post
regulation with resilient offline and fast-growing online
1.6%
2.1%
2.8%
3.5%
4.3%
1.8%
2.7%
3.7%
4.8%
6.3%
0%
1%
2%
3%
4%
5%
6%
7%
2016 2017 2018 2019E 2020E
EDU TAL
Source: Credit Suisse research
■ Offline business is still resilient. Though regulation tightening caused
slowdown in capacity expansion and additional costs to EDU and TAL’s
offline business, we believe the offline business of EDU and TAL is still
resilient. We expect higher GPM in FY20-21 as utilisation rate rises under
slower offline expansion. Consolidation continues post regulation. We
expect EDU and TAL’s combined market shares in China’s K12 tutoring
market to increase from 6.5% in 2018 to 8.3% in 2019 and 10.6% in 2020.
■ Secular growth opportunity from online. Riding on the trend of
technology-driven innovation and strong demand for quality education, we
expect the online penetration rate of K12 tutoring market to rise from 7% in
2018 to 16% in 2021. We believe TAL and EDU are well-positioned to
capture secular growth opportunity from online.
■ Prefer EDU to TAL on clearer offline expansion plan. We believe the
market has overestimated policy risk in the near term and underestimated
the potential of online education in the long run. We like EDU’s clear plan to
expand offline capacity and strengthen online capability on undemanding
valuation. We also believe TAL should be able to reaccelerate its offline
expansion with the dual teacher model. We roll over our P/E based
valuation for profitable offline business from FY19 to FY20 and increase
our SOTP-based TP for EDU and TAL to US$112.7 (from US$88.4) and
US$44.3 (from US$36.6), respectively. Key risks: (1) adverse regulatory
policies; and (2) failure in online product improvement.
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