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1、InitiationofCoverageChinaEducationSectorIfyouthink"education"isexpensive,tryignoranceWeinitiatecoverageofTALandNewOrientalwithBuyratingsWeinitiatecoverageofChina'seducationsectorandofTALEducation(TAL,Buy,PTUS$185.52)andNewOrientalEducation&Technology(NewOriental,Buy,
2、PTUS$96.75).WearepositiveonChina'sK12(kindergartentograde12)afterschooltutoringmarket,expectingittodoubleinfiveyears,fromRmb497bnin2016toRmb1,082bn(andlikelyabovemarketexpectations)in2021.WebelieveTALandNewOriental,thetwolargestinstitutionsintermsofrevenueinafragment
3、edmarket,arewellpositionedtogainshareassectorconsolidationaccelerates.Weexpectthemtocontinuedeliveringabove-consensusgrowthandprofitabilityduetotheirsuperiorteachingqualityandtrackrecords,strongplatformtorecruitandretaintoptutors,leadingbrands,andhighdegreeofoperatin
4、gleverage.TwomismatchesarekeydriversofK12afterschooltutoring'sstructuralgrowthWebelievethekeydriversofChina'sK12afterschooltutoringmarket'srapidgrowthareacoupleofmismatches.1)TheincreasingnumberofK12studentsconcentratedinbiggercities(fromrisingurbanisationandagrowing
5、birthrate)vsaninsufficientanddecliningnumberofpublicschoolsinbiggercities.2)Parents'highexpectationsfortheirchildren'seducation(withfiercecompetitiontogainadmissionintothetopuniversities)vsthegovernment'seffortsto"reducestudents'workload"inpublicschools.Inaddition,ri
6、singdisposableincomesandtheconventionalimportanceofagoodeducationmeanparentsarewillingtopayhighfees.Topconsiderationinparents'minds:TALandNewOrientaltobenefitAccordingtoaniResearchsurvey,middle-incomeparents'topthreecriteriawhenchoosingafterschooltutoringare:teaching
7、qualityandoutcomes;tutors'educationalqualificationsandinstitutions'brands.WebelievethesecriteriafavourTALandNewOriental.TALandNewOriental'smarketsharegainshavebeenacceleratinginbiggercities(acollective16%shareinBeijing,vs2.5%acrossChina).Thesurveyalsosuggestsparentsa
8、relesssensitivetoprices,implyingupsidepotentialtoTALandNewOriental'sprices.BuyTALandNewOriental;expensiveonPEbutattractiveonPEGWith
