中國教育行業(yè)-學(xué)術(shù)AST時代的終結(jié)？將該行業(yè)評級下調(diào)至中性-2021.7.29-27正式版

ChinaEducationSector

UBS-SResearchTHESISMAP

MOSTFAVORED

LEASTFAVORED

SectorThesisMap

NA

NA

PivotalQuestions

Q:Howwilltherecent“DoubleReduction”O(jiān)pinionimpactcurrentASTcompanies'

businessmodels?

WeexpecttheregulationtonegativelyimpactcurrentK12ASTbusinessmodelssubstantially.

Importantly,consideringthecombinedimpactsoftheserequirements,webelievelistcoswillno

longerbeallowedtoconductK12academicAST.WeestimateK12academicASTcontributed

c100%/80%/56%ofTAL/EDU/Koolearn’sFY21revenue(includingpreschoolbusinessforKoolearn).

WebelievethewayforwardforcurrentASTlistcoswillbetotransitiontonon-academicK12ASTand

otheragegroups,suchasuniversitystudentsandadults.Listcosarepermittedtooperateinthese

segmentsunderthelatestregulationandcanbefor-profit.

WHAT′SPRICEDIN?

WithEDU/TAL/Koolearntradingclosetoorevenbelowtheirresidualvalues(cashandSTinvestment

netofothercurrentliabilities,debtandUBS-SeFY22EOCF),wethinkthemarkethasmostlypricedin

thenear-termregulationshock.

UBS-SVIEW

WeexpecttheregulationtonegativelyimpactcurrentK12ASTbusinessmodelssubstantially.

Importantly,consideringthecombinedimpactoftheserequirements,webelievelistcoswillnolonger

beallowedtoconductK12academicAST.WeestimateK12academicASTcontributed

c100%/80%/56%ofTAL/EDU/Koolearn’sFY21revenue.Webelievethewayforwardforcurrent

ASTlistcoswillbetotransitiontonon-academicK12ASTandotheragegroups,suchasuniversity

studentsandadults.Listcosarepermittedtooperateinthesesegmentsunderthelatestregulation

andcanbefor-profit.

EVIDENCE

TheOpinionrequiresacademic(ie,onsubjectstaughtatschool)AST:1)cannotbepubliclytradedor

conductcapitalmarketactivities;2)mustbeNFP;3)cannothaveexposuretoforeignownership;and

4)cannotconductcoursesonweekends/publicholidaysandsummer/winterbreaks.

Figure1:Residualvalueandcurrentmarketcap

(US$m)

5,000

4,080

4,127

4,046

4,000

3,000

2,971

2,000

1,000

536

368

0

TAL

EDU

Koolearn

Residualvalue

Currentmktcap

Source:Companydata,UBS-Sestimates

Note:Marketcapdataasof28July2021;Residualvalue,asofthelatestreportingperiodend,isthesumofcashandSTinvestments,netofothercurrentliabilities,debtandUBS-SecashoutflowforFY22E

ChinaEducationSector29July2021 abc2

ChinaEducationSector

PivotalQuestions

PivotalQuestions

Howwilltherecent“DoubleReduction”O(jiān)pinionimpactcurrentASTcompanies'businessmodels?

UBS-SVIEW

WeexpecttheregulationtonegativelyimpactcurrentK12ASTbusinessmodelssubstantially.Importantly,theOpinionrequiresacademic(ie,onsubjectstaughtatschool)AST:1)cannotbepubliclytradedorconductcapitalmarketactivities;2)mustbeNFP;3)cannotbecontrolledbyorhaveshareholdersthatareforeigncapital;and4)cannotconductcoursesonweekends/publicholidaysandsummer/winterbreaks.Consideringthecombinedimpactoftheserequirements,webelievelistcoswillnolongerbeallowedtoconductK12academicAST.WeestimateK12academicASTcontributedc100%/80%/56%ofTAL/EDU/Koolearn’sFY21revenue(includingpre-schoolbusinessforKoolearn).

MostoftherestrictionsintheOpinionaretargetingacademicAST,whileleavingdoorsopenforlistcostoconductnon-academic(ie,art,sports,science,programming,etc.)K12AST.Weseehealthydemandinthisarea,butnoteitwillbeatoughtransitionforthelistcosgiventhesubstantialemployeereskillingneeded.Othersaferareaswouldbeeducationforadults/universitystudents.Foroverseastestprep,weseeriskfortheK12side,givenitcouldbetreatedasacademic(giventhesubjectmatterisusuallyEnglishwhichisacademic)anditcouldviolatetherestrictiononusingforeigntextbooks.

EVIDENCE

TheOpinionimposedmorestringentmeasuresonK12academic(ie,subjectstaughtatschool)AST,mainlyincluding:

Scheduling:K12academicASTarenotallowedtodeliverclassesonpublicholidays,weekendsandsummer/winterbreaks.

ASTlicensingandsetup:foroffline,newlicencesforK12academicASTandpre-schoolASTlearningcentres(LCs)willnolongerbeissued;currentacademicASTneedtore-registerasnot-for-profit(NFP);onlineK12academicASTshouldbere-examinedandrequiredtogetapprovalfromgovernment(comparedwiththepreviousfilingsystem,whereonlineK12ASTonlyneededtofilerecordsundergovernment’smanagement).OnlineASTforpre-schoolchildrenisnotallowed.

Capitalmarketactivities:allacademicASTcannotbelisted;foreigncapitalisprohibitedfromholdingcontrollingstakesorbecomingshareholdersofacademicAST.

Advertising:advertisementsforASTarenotallowedonmainstreammedia,newmedia,publicspaces,residentialcommunitiesandonlineplatformsetc.

ASP:academicASTwillneedtofollowthegovernment’srecommendedpricing,startingfromthetrialcities(incl.majorcitiessuchasBeijing,Shanghai,andGuangzhou;atleastonecityineachprovince).

Forthenon-academicAST,theOpinionspecifiedthesettingofclearclassificationsandstandardsfordifferentnon-academicASTcategoriesincludingphysicaleducation,cultureandarts,andtechnologyetc.;strictapproval/issuingthelicences.TheOpinionalsomentionedtheproperintroductionofnon-academicASTprovidersintotheafter-schoolchildcareservicesofferedbythepublicsystem.Moreover,theOpinionprohibitedASTfromusingforeigntextbooksortheemploymentofforeignerslocatedoutsideChinatogiveclasses.

WHAT′SPRICEDIN?

WithEDU/TAL/Koolearntradingclosetoorevenbelowtheirresidualvalues(cashandSTinvestmentnetofothercurrentliabilities,debtandUBS-SeFY22EOCF),webelievethemarkethasmostlypricedinthenear-termregulationshock.

UBS-SResearch

ChinaEducationSector29July2021 abc3

SubstantialnegativeimpactfromtheregulatorymeasurestocurrentK12ASTbusinessmodel

WebelievethesesubstantialnegativeregulatorymeasureswillmateriallyunderminetheviabilityofacademicASTandlistcoswillnolongerbeallowedtoconductK12andpre-schoolacademicASTactivities,whichcontributedc100%/80%/56%ofTAL/EDU/Koolearn’sFY21Erevenue.

WeexpectEDU/Koolearntohave20%/35%non-academicK12revenueexposureinFY21E.Specifically,weestimate14%ofEDU‘srevenuetocomefromoverseastestprepandconsultingbusiness,whichpartiallytargethighschoolstudentsandcouldbeunderregulationscrutiny.Koolearn’snon-academicK12businessmainlycomesfromcollegeeducation;asaferhaveninthecurrentregulatoryenvironment,inourview.

Figure2:EDU’srevenuebreakdown(FY21E)

100%

4%

2%

Others

80%

3%

Koolearn-non-

60%

academic

77%

Koolearn-K12and

40%

preschoolacademic

K12academicAST

20%

Overseatestprepand

14%

0%

consulting

EDU

Source:UBS-Sestimates

Figure3:Koolearn’srevenuebreakdown(FY21E)

100%

9%

80%

2%

Institutionalcustomers

60%

54%

Pre-schoolEducation

40%

K12academicAST

20%

35%

Collegeeducation

0%

Koolearn

Source:UBS-Sestimates

Non-academicASTanduniversity/adulteducationcouldbethepathforward,whilethisislikelyasmallermarketwithlessscalability

AccordingtoUBSEvidenceLab‘ssurveyin2020,only11%ofparentsreportedthattheirchildrenattendedqualityeducation(incl.artsandsports),mostlydrivenbyelementaryschoolstudents.Fromourchannelchecks,wehaveseenmajorK12companiespilotingthenon-academicK12andadults/universityeducationtohedgeagainsttighteningregulationsontheacademicAST.

EDUrecentlyformedateamtofocusonnon-academicbusinessstrategy,accordingtorelatedsources.Thecompanyhasinvestedinseveralnon-academicandadulteducationinstitutionssincethebeginningof2021,includingUniterra,aniceskatingtrainingandaestheticeducationinstitution,andDaodaneducation,atraininginstitutionforpublicservicetests.NewOrientalinTianjingalsoaddednon-academictrainingandchildcareservicetoitsbusinessscopeon29June2021.

TALinvestedinHappyBallet,achildren’sballeteducationalinstitution,inJanuary2021.ItalsolaunchedQingzhoubrandon7July2021,whichoffersdomestictestprep,languagetrainingandoverseasprepservicesforcollegestudents.Accordingtothecompany,Qingzhougraduateshoolexamprephasaccumulated23musers.In2020,therewere2.7mnewusersregisteredforQingzhougraduateschoolexamprep,about80%ofthetotalcandidatesforthegraduateschoolentranceexamintheyear.

Wenoteagreatdealofcapitalhasbeenflowingintothenon-academiceducationsectorsince2021.AccordingtoQianzhan,among48investment/financingevents(totallingRmb9bn)ineducationindustryinJan-May2021,10ofthem(totallingRmb4.2bn)wereinvestedintheadulteducationsectorand9(totallingRmb2.9bn)insteameducation.

Whilewebelievenon-academicK12ASTandeducationforadults/universitystudentscouldbethemajorpathsforwardforcurrentK12ASTlistcos,weshouldalsonoticethechallengetheycouldfacefromthosecompanies(eg,Offcn)whichhavebuiltupstrongpositionsintheseverticals.Moreover,thetransitioncouldbeeventoughergiventhesubstantialemployeereskilling/hiringeffortsneeded.Webelievethesesegmentswill

ChinaEducationSector29July2021 abc4

likelyhaveslowergrowthpotentialsgiventhelowerpopulationbase(ofuniversitystudentscomparedwithK12)andmorediversifiedsubjectmatters(thereforelessscalable).

Figure4:StudentASTattendancebysubjects(2020)

Quality

education,

Othersubjects,

Chemistry,3.4%

0.7%

4.3%

Art,sports,

Math,30.1%

7.5%

Physics,

7.8%

Chinese,

17.8%

English,

28.5%

Figure5:Studentsattendancetoqualityeducation(incl.artsandsports)byschoollevel(2020)

16.0%

14.5%

14.0%

12.0%

10.0%

8.0%

6.0%

4.7%

5.2%

4.0%

40%

35%

31%

2.0%

30%

29%29%

29

25%

--

20%

Elementaryschool

Juniorhighschool

Seniorhighschool

15%

Source:UBSEvidenceLab(>AccessDataset);Note:Art,sports(suchaspiano,dance,music,etc.);Qualityeducation(suchascoding,speech,STEM,etc.)

Source:UBSEvidenceLab(>AccessDataset);Note:Art,sports(suchaspiano,dance,music,etc.);Qualityeducation(suchascoding,speech,STEM,etc.)

Estimaterevisions

WeassumetheOpiniontobeimplementedfromAug2021andhavesubstantiallyloweredthesubsequentforecastperiods.WelowerFY22-24ErevenueforTALby57-96%,assumingsometransitionstonon-academicAST(moreconservativethanUBSEvidenceLabdatapoint).WelowerEDU/Koolearn’sFY22-24Erevenuesby67-85%/71-87%;smallerimpactthanTALduetoEDU/Koolearn’snon-K12ASTexposure,whichwebelieveshouldberelativelyintact.Weexpectallthreecompaniestobelossmakingintheneartermandreachmuchlowermid-termprofitability/returns,underthetighterregulationenvironment.

OnDCFassumptions,weraisebetato2forallthreecompaniestoreflectthematerialincreaseinrisks/uncertaintiesaroundregulationimplementationandtheirnecessarybusinesstransitionsahead.

Figure6:TALnewvsoldestimates

US$m

FY22E

FY23E

FY24E

New

Old

Change

New

Old

Change

New

Old

Change

Revenue

2,882

6,692

-56.9%

503

9,452

-94.7%

483

13,031

-96.3%

GrossProfit

1,078

3,868

-72.1%

70

5,635

-98.8%

111

7,973

-98.6%

GPM

37.4%

57.8%

-2,039bps

13.8%

59.6%

-4,576bps

23.0%

61.2%

-3,821bps

Non-GAAPadj.EBIT

(466)

618

NA

(124)

1,469

NA

(17)

2,426

NA

Non-GAAPadj.EBITmargin

-16.2%

9.2%

-2,539bps

-24.7%

15.5%

-4,026bps

-3.6%

18.6%

-2,221bps

Non-GAAPadj.netprofit

(231)

634

NA

(6)

1,326

NA

50

2,155

-97.7%

Non-GAAPadj.netmargin

-8.0%

9.5%

-1,751bps

-1.2%

14.0%

-1,519bps

10.3%

16.5%

-628bps

EPS(US$)

(0.36)

0.98

NA

(0.01)

2.06

NA

0.08

3.34

-97.7%

Source:UBS-Sestimates

ChinaEducationSector29July2021 abc5

Figure7:InputsforDCFvaluation-TAL

InputsforDCFvaluation

Medium-termgrowthperiod

10years

Reinvestmentrate

100.0%

Medium-termROIC

10.0%

Medium-termgrowthrate

10.0%

Terminalgrowthrate

2.0%

TerminalROIC

13.0%

WACCderivation

Risk-freerate

3.2%

Equityriskpremium

5.0%

Beta

2.0

Costofequity

13.2%

Costofdebt

6.0%

Marginaltaxrate

25.0%

Aftertaxcostofdebt

4.5%

Debt/totalcapital

0.0%

WACC

13.2%

Source:UBS-Sestimates

Figure8:Valuationsummary-TAL

Valuationsummary

(USD)

Stage1DCF

(536)

Stage2DCF

392

Stage3Terminalvalue

1,035

Non-coreoperations

-

Totalenterprisevalue

891

Less:

Netcash/(debt)

3,060

Minorityinterests

-

NPV(USDm)

3,951

NPV(USDm)

3,951

Sharesoutstanding

645

Pricetarget

6.13

Currency

Reporting

USD

Trading

USD

Spotrate:USDperUSD

1.00

Source:UBS-Sestimates

Figure9:EDUnewvsoldestimates

US$m

FY22E

FY23E

FY24E

New

Old

Change

New

Old

Change

New

Old

Change

Revenue

1,932

5,800

-66.7%

1,430

7,326

-80.5%

1,410

9,339

-84.9%

GrossProfit

421

3,179

-86.7%

526

4,124

-87.2%

526

5,304

-90.1%

GPM

21.8%

54.8%

-3,300bps

36.8%

56.3%

-1,950bps

37.3%

56.8%

-1,950bps

Non-GAAPadjustedEBIT

(738)

763

NA

(146)

1,176

NA

(66)

1,639

NA

Non-GAAPadjustedEBITmargin

-38.2%

13.1%

-5,135bps

-10.2%

16.0%

-2,625bps

-4.7%

17.5%

-2,225bps

Non-GAAPadjustednetprofit

-476

801

NA

-57

1,120

NA

3

1,491

-99.8%

Non-GAAPadjustednetmargin

-24.6%

13.8%

-3,843bps

-4.0%

15.3%

-1,925bps

0.2%

16.0%

-1,578bps

Non-GAAPadj.EPS(US$)

(0.28)

0.46

NA

(0.03)

0.65

NA

0.00

0.86

-99.8%

Source:UBS-Sestimates

Figure10:InputsforDCFvaluation-EDU

InputsforDCFvaluation

Medium-termgrowthperiod

10years

Reinvestmentrate

70.0%

Medium-termROIC

22.0%

Medium-termgrowthrate

15.4%

Terminalgrowthrate

2.0%

TerminalROIC

14.0%

WACCderivation

Risk-freerate

3.2%

Equityriskpremium

5.0%

Beta

2.0

Costofequity

13.2%

Costofdebt

6.0%

Marginaltaxrate

20.0%

Aftertaxcostofdebt

4.8%

Debt/totalcapital

0.0%

WACC

13.2%

Source:UBS-Sestimates

Figure11:Valuationsummary-EDU

Valuationsummary

(USD)

Stage1DCF

265

Stage2DCF

837

Stage3Terminalvalue

203

Non-coreoperations

431

Totalenterprisevalue

1,737

Less:

Netcash/(debt)

2,335

Minorityinterests

(45)

NPV(USDm)

4,026

NPV(USDm)

4,026

Sharesoutstanding

1,714

Pricetarget

2.35

Currency

Reporting

USD

Trading

USD

Spotrate:USDperUSD

1.00

Source:UBS-Sestimates

ChinaEducationSector29July2021 abc6

Figure12:Koolearnnewvsoldestimates

Rmbm

2022E

2023E

2024E

New

Old

Change

New

Old

Change

New

Old

Change

Revenue

878

2,987

-70.6%

930

4,905

-81.0%

1,030

7,947

-87.0%

GrossProfit

544

1,248

-56.4%

562

2,297

-75.5%

583

3,933

-85.2%

GPM

62.0%

41.8%

2,018bps

60.4%

46.8%

1,355bps

56.6%

49.5%

714bps

Adj.EBIT

(35)

(992)

NA

59

(450)

NA

89

39

130.0%

Adj.EBITmargin

-4.0%

-33.2%

2,918bps

6.4%

-9.2%

1,555bps

8.6%

0.5%

814bps

Adj.netprofit

(23)

(1,024)

NA

61

(473)

NA

88

97

-8.9%

Adj.netmargin

-2.7%

-34.3%

3,161bps

6.6%

-9.7%

1,625bps

8.6%

1.2%

736bps

Adj.EPS(Rmb)

(0.02)

(1.09)

NA

0.07

(0.50)

NA

0.09

0.10

-8.9%

Source:UBS-Sestimates

Figure13:InputsforDCFvaluation-Koolearn

InputsforDCFvaluation

Medium-termgrowthperiod

10years

Reinvestmentrate

100.0%

Medium-termROIC

18.0%

Medium-termgrowthrate

18.0%

Terminalgrowthrate

2.0%

TerminalROIC

11.0%

WACCderivation

Risk-freerate

3.2%

Equityriskpremium

5.0%

Beta

1.5

Costofequity

10.7%

Costofdebt

6.0%

Marginaltaxrate

15.0%

Aftertaxcostofdebt

5.1%

Debt/totalcapital

0.0%

WACC

10.7%

Source:UBS-Sestimates

Figure14:Valuationsummary-Koolearn

Valuationsummary

(Rmb)

Stage1DCF

685

Stage2DCF

1,822

Stage3Terminalvalue

619

Non-coreoperations

82

Totalenterprisevalue

3,208

Less:

Netcash/(debt)

475

Minorityinterests

-

NPV(Rmbm)

3,683

NPV(HKDm)

4,489

Sharesoutstanding

939

Pricetarget

4.78

Currency

Reporting

Rmb

Trading

HKD

Spotrate:HKDperRmb

1.22

Source:UBS-Sestimates

ChinaEducationSector29July2021 abc7

ChinaEducationSector UBS-SResearch

What′sPricedIn?

WHAT′SPRICEDIN?

Residualvalueandcurrentmarketcap

(US$m)

5,000

4,080 4,127 4,046

4,000

2,971

3,000

2,000

1,000

536

368

0

TAL

EDU

Koolearn

Residualvalue

Currentmktcap

Source:Companydata,UBS-Sestimates

Note:Marketcapdataasof28July2021;Residualvalue,asofthelatestreportingperiodend,isthesumofcashandSTinvestments,netofothercurrentliabilities,debtandUBS-SecashoutflowforFY22E.

ComparingTAL/EDU/Koolearn'scurrentmarketcapswiththeirresidualvalues(cashandSTinvestmentnetofothercurrentliabilities,debtandUBS-SeFY22EOCF),webelievethemarketispricinginlowervalueforTAL’sfuturepotentialnon-academictransitions,whileassigningmodestvaluationstoEDU/Koolearn'srelativelylargerexistingexposurestonon-academicAST.Weviewthemarket'sconservativeviewsaboutTAL'spotentialtransitionasreasonable,givenitslimitedtrackrecordinothernon-academicsegments.TAL/EDU'scurrentFY22EPSlevelisatthelowendofprivateK12schooloperators,asubsectoralsofacingsubstantialregulationheadwinds.

ChinaEducationSector29July2021 abc8

Peersvaluation

Companyname

Ticker

Price

Mktcap30-dADV

PS

SalesCAGR

PSG

PE

EPSCAGR

PEG

PB

(LC)

(USDm)

(USDm)

FY1E

FY2E

FY3E

(FY0-FY3E)

FY1E

FY2E

FY3E

(FY0-FY3E)

FY1E

K12AfterschoolTutoring

TAL*

TAL.N

6.40

4,127

96.2

0.9x

1.3x

7.6x

(46.4%)

NA

17.7x

NA

NA

NA

NA

0.7x

NewOriental*

EDU.N

2.36

4,046

54.1

1.0x

2.1x

2.8x

(26.3%)

NA

7.5x

NA

NA

NA

NA

1.4x

Koolearn*

1797.HK

4.17

536

15.6

2.2x

3.7x

3.5x

(4.9%)

NA

NA

NA

53.2x

NA

NA

1.8x

GSX

GSX.N

3.62

925

19.6

0.6x

0.4x

0.3x

39.6%

0.01x

NA

NA

4.2x

NA

NA

1.5x

OneSmart

ONE.N

0.55

89

0.1

0.1x

0.1x

0.1x

22.5%

0.00x

NA

2.0x

1.3x

NA

NA

3.8x

Youdao

DAO.N

9.44

1,189

3.3

1.3x

0.9x

0.7x

48.8%

0.02x

NA

NA

268.9x

NA

NA

NA

17Education

YQ.O

1.22

235

6.2

0.6x

0.3x

0.2x

76.9%

0.00x

NA

NA

NA

NA

NA

5.0x

RISE

REDU.O

1.16

66

0.1

0.3x

0.2x

0.2x

31.6%

0.01x

3.6x

1.9x

1.6x

NA

NA

0.7x

51Talk

COE.N

3.35

72

0.4

0.2x

0.2x

NA

NA

NA

NA

5.8x

NA

NA

NA

NA

Lanxum

300010.SZ

3.62

483

35.2

1.7x

1.6x

1.4x

17.5%

0.09x

16.9x

7.8x

4.2x

NA

NA

1.5x

ScholarEducation

1769.HK

1.54

110

2.8

0.6x

0.5x

0.4x

34.3%

0.01x

4.3x

3.0x

2.2x

88.7%

0.03x

0.7x

Average

828

15.9

0.9x

1.0x

1.7x

19.4%

0.02x

10.0x

4.1x

48.0x

88.7%

0.03x

1.9x

Privatehighereducation

ChinaEducationGroup*

0839.HK

13.62

3,980

18.8

7.2x

5.6x

4.2x

31.8%

0.17x

17.3x

14.3x

10.8x

29.5%

0.48x

2.9x

NewHigherEducation

2001.HK

3.62

737

3.8

2.9x

2.4x

2.1x

48.3%

0.05x

7.8x

6.1x

5.1x

76.5%

0.08x

1.7x

HopeEducation

1765.HK

1.35

1,384

9.7

3.8x

3.0x

2.6x

62.0%

0.05x

10.5x

8.4x

7.3x

111.6%

0.07x

1.2x

MinshengEducation

1569.HK

1.10

596

0.2

1.8x

1.6x

1.3x

37.7%

0.04x

6.0x

5.3x

4.6x

85.3%

0.06x

NA

YuhuaEducation

6169.HK

4.44

1,913

11.0

4.6x

4.1x

3.8x

13.1%

0.31x

9.4x

8.2x

7.5x

106.3%

0.08x

2.9x

XinhuaEducation

2779.HK

1.61

333

0.3

3.5x

2.8x

2.4x

23.3%

0.12x

5.3x

4.4x

3.9x

19.4%

0.23x

0.6x

KepeiEducation

1890.HK

3.87

1,002

3.0

4.9x

3.8x

3.3x

32.4%

0.12x

8.3x

6.6x

5.6x

27.3%

0.24x

1.8x

EdvantageGroup

0382.HK

5.11

704

2.1

3.7x

2.8x

2.4x

36.0%

0.08x

10.3x

7.5x

6.1x

37.1%

0.20x

1.8x

Average

1,207

5.4

4.0x

3.3x

2.8x

35.6%

0.12x

9.4x

7.6x

6.4x

61.6%

0.18x

1.8x

PrivateK12education

ChinaMapleLeaf

1317.HK

1.49

573

2.7

1.8x

1.6x

1.4x

21.6%

0.07x

6.3x

5.4x

4.7x

17.5%

0.31x

0.7x

ViscendEducation

1565.HK

0.81

321

0.2

0.9x

0.7x

0.5x

35.0%

0.02x

4.6x

3.7x

2.1x

63.7%

0.06x

0.7x

WisdomEducation

6068.HK

1.60

448

1.4

1.3x

1.1x

1.0x

19.8%

0.06x

4.7x

4.1x

3.5x

16.9%

0.24x

0.9x

TianliEducation

1773.HK

1.92

534

6.7

1.9x

1.3x

0.9x

41.8%

0.03x

6.6x

4.6x

3.3x

38.5%

0.12x

0.9x

HailiangEducation

HLG.N

36.90

901

0.0

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

BrightScholar

BEDU.N

3.48

415

0.0

0.7x

0.6x

0.6x

11.8%

0.05x

11.9x

7.4x

5.3x

49.4%

0.15x

0.9x

Average

532

1.8

1.3x

1.1x

0.9x

26.0%

0.05x

6.8x

5.1x

3.8x

37.2%

0.18x

0.8x

Vocationalandothereducation

ChinaEastEducation

0667.HK

8.48

2,399

14.4

3.2x

2.7x

2.4x

22.1%

0.12x

15.6x

12.8x

10.9x

79.5%

0.16x

2.3x

OffcnEducation

002607.sz

12.55

11,889

75.2

5.3x

4.1x

3.2x

29.3%

0.14x

27.4x

20.7x

15.6x

29.4%

0.70x

11.2x

LAIX

LAIX.N

1.00

50

0.1

0.5x

0.5x

0.6x

(15.9%)

NA

NA

NA

NA

NA

NA

NA

iHumanInc

IH

6.75

360

0.4

2.3x

1.5x

1.1x

61.1%

0.02x

NA

107.5x

31.4x

NA

NA

4.3x

Average

2,179

13.1

2.8x

2.2x

1.8x

24.1%

0.10x

21.5x

47.0x

19.3x

54.5%

0.43x

5.9x

Source:Companydata,ThomsonReuters,UBS-Sestimates

Note:Dataasof28July2021.*referstoUBS-Sestimates.TherestarebasedonThomsonReutersconsensus

ChinaEducationSector29July2021 abc9

ChinaEducationSector UBS-SResearch

UBS-SResearchTHESISMAPThesisaguideMaptoourthinkingandwhat′swhereinthisreport

PivotalQuestions Q:Howwilltherecent“DoubleReduction”O(jiān)pinionimpactcurrentASTcompanies'

businessmodels?

WeexpecttheregulationtonegativelyimpactcurrentK12ASTbusinessmodelssubstantially.

Importantly,consideringthecombinedimpactoftheserequirements,webelievelistcoswillnolongerbeallowedtoconductK12academicAST.WethinktheregulatoryimpactonTAL'sexistingbusinessshouldbegreaterthanEDU/Koolearn,asweestimateK12academicASTcontributesc100%ofTAL'sFY21Erevenue.WebelievethewayforwardforTALwillbetotransitiontonon-academicK12ASTandotheragegroups,suchasuniversitystudentsandadults.Listcosarepermittedtooperateinthesesegmentsunderthelatestregulationandcanbefor-profit.

UBS-SVIEW

EVIDENCE

WHAT′SPRICEDIN?

Upside/DownsideSpectrum

WeexpecttheregulationtonegativelyimpactcurrentK12ASTbusinessmodelssubstantially.Importantly,consideringthecombinedimpactoftheserequirements,webelievelistcoswillnolongerbeallowedtoconductK12academicAST.WeestimateK12academicASTcontributedc100%ofTAL’sFY21revenue,greaterthanEDU/Koolearn.WebelievethewayforwardforTALwillbetotransitiontonon-academicK12ASTandotheragegroups,suchasuniversitystudentsandadults.Listcosarepermittedtooperateinthesesegmentsunderthelatestregulationandcanbefor-profit.

TheOpinionrequiresacademic(ie,onsubjectstaughtatschool)AST:1)cannotbepubliclytradedorconductcapitalmarketactivities;2)mustbeNFP;3)cannothaveexposuretoforeignownership;and4)cannotconductcoursesonweekends/publicholidaysandsummer/winterbreaks.

WithTALtradinginlinewithitsresidualvalue(cashandSTinvestmentnetofothercurrentliabilities,debtandUBS-SeFY22EOCF)(US$4.1bnmarketcapvsUS$4.0bnresidualvalue),webelievethemarkethasmostlypricedinthenear-termregulationshock.

UpsidetoDownside

US$6.40

Revenue

22EP/S

TAL.NPrice

pershare

(UBS)

1.1to1

100

(UBS)

Implied

(USD)

90

80

70

60

50

40

30

20

10.98=

6.10

1.8x

Upside:

+72%

10

6.13=

4.47

1.4x

Base:

-4%

0

28Jul

2.05=

3.42

0.6x

Downside:

-68%

2019

2020

2021

+12mo.

Source:UBS-S

Valuedrivers(FY22E)

Smallclassrevenuegrowth

Othersrevenuegrowth

US$10.98upside

-14%

-9%

US$6.13base

-34%

-39%

US$2.05downside

-49%

-54%

Source:UBS-Sestimates

CompanyDescription TALEducationGroup(TAL)isaleadingproviderofK12afterschooltutoringinChina.Itofferstutoringservicesforcoreacademicsubjects,consultingservicesforoverseasstudiesandtest-preparationcourses.TALprovidessmallclasstutoringunderitsXueersiPeiyou,MobbyandFirstleapbrands,personalisedpremiumservicesthroughIzhikangandShunshunLiuxue,andonlinecourses.

ChinaEducationSector29July2021 abc10

ChinaEducationSector UBS-SResearch

Upside/DownsideSpectrum

Upside/DownsideSpectrum

UpsidetoDownside

US$6.40

Revenue

22EP/S

TAL.NPrice

pershare

(UBS)

1.1

to

1

100

(UBS)

Implied

(USD)

90

80

70

60

50

40

30

20

10.98=

6.10

1.8x

Upside:

+72%

10

6.13=

4.47

1.4x

Base:

-4%

0

28Jul

2.05=

3.42

0.6x

Downside:

-68%

2019

2020

2021

+12mo.

Source:UBS-S

Valuedrivers(FY22E)

Smallclassrevenuegrowth

Othersrevenuegrowth

US$10.98upside

-14%

-9%

US$6.13base

-34%

-39%

US$2.05downside

-49%

-54%

Source:UBS-Sestimates

Risktothecurrentsharepriceisrelativelybalanced(upside:downside1.1:1)

TAListradingatUS$6.40(asof28July)

UPSIDE(US$10.98):WeassumeTAL'ssmallclassrevenuedeclinesby14%duetoafaster-than-expectedtransitiontonon-academicAST.Similarly,fortheotherrevenuesegments(incl.onlineand1-on-1tutoring),weexpectFY22revenuetodeclinelessthaninourbasecase,by9%.Weapply1.8xFY22EPS,closetothehighendofprivateK12schooloperators–asegmentwithsimilarregulationrisk–andderiveourupsidevaluationofUS$10.98pershare.

BASE(US$6.13):WeexpectTAL'ssmallclassrevenuetodeclineby34%duetotheOpinion'ssevereimpactsonTAL'scoreacademicASTbusiness.Similarly,fortheotherrevenuesegments(incl.onlineand1-on-1tutoring),weexpectFY22revenuetodeclineby39%.OurPTimpliesUS$4.1bnequityvaluationwhichisclosetoTAL'sUBS-Seresidualvalueandimpliesalmostnovaluationforitstransitiontoothereducationsegmentsbeyo