China Education:2017policy change No.5,Leaders to benefit from market clean-up

Jinan government reiterated prohibition of school teachers from providing after-school tutoring service

    Jinan (provincial capital of Shandong Province) Education Bureau is cleaning up the after-school tutoring service market and strictly prohibit school teachers from offering paid after school tutoring classes. School teachers are not allowed to provide after school tutoring classes by him/herself nor be employed as part-time teachers in tutoring schools. Jinan Education Bureau also announced the details of punishment on relevant teachers, school headmasters and schools. We believe public school teachers provide around 30% after school tutoring services in China, mostly with mama N papa learning centers. EDU and TAL will be immune to this clean up, because they do not recruit public school teachers. We view this cleaning up campaign is an indication of regulation trend in K-12 tutoring market. The intensive regulation on public school teachers will secure the quality of these schools which are key pillars of China education. Tutoring as a supplementary education service is not a focus of education regulation.

    Nationwide investigation going on; positive for market leaders

    Ministry of Education announced to have similar investigated paid after school tutoring in 6 provinces including Liaoning, Jilin, Heilongjiang, Henan, Hubei and Hunan. Government plans to launch further investigation in other provinces in 2H17 and 2018. We believe the cleaning up campaign will reduce the tutoring classes provided by school teachers and schools after regular school time. Besides, small tutoring institutions which hire school teachers as part-time teachers will be impacted. Since parents’ and students’ demand remains strong, the leading incumbents, with better brand names and high quality tutoring service, are likely to take more market share, in our view. EDU and TAL has 20k and 14k full-time and part-time teachers, respectively. Teacher recruitment of both companies is fully compliant with government regulation.

    Expect more policy to settle in two months

    Recall Shanghai government’s tutoring market cleaning up since June, tutoring schools without licenses stopped operation and unqualified schools ceased student enrollment. We expect more local government to follow the practice in Shanghai and Jinan to build up a more regulated tutoring market, before September 1st.

    Maintain Buy on both names

    We expect the policy will not hurt student demand for K-12 tutoring. We maintain Buy on both names, with target price of USD90 on EDU and USD148 on TAL, both based on 1.1x PEG. We maintain PEG as our primary valuation methodology and the 1.1x multiple reflects our confidence in the fast-growing K-12 tutoring market. Downside risks for the industry: (1) slower enrolment growth; and (2) slower online education deployment.