After an excellent quarterly performance, estimates for China’s leading private education provider have been rising, sending the stock back to a Zacks rank #1 (Strong Buy).
About the Company
TAL Education Group (XRS) is a leading K-12 after-school tutoring services provider in China. The acronym "TAL" stands for "Tomorrow Advancing Life," which according to the company, reflects their vision to promote top learning opportunities for K-12 students through high-quality teaching and content, as well as leading edge application of technology in the education experience.
They have learning center network in 19 major cities in China and also operate an online education platform in China. They offer tutoring services in many subjects and in multiple formats including small class, one-on-one and online courses.
The company IPO’d in 2010 and has seen exponential growth since then, with 571% growth in student enrollments and 163% growth in number of learning centers.
Excellent Quarterly Results and Strong Guidance
The company reported its Q2 FY 2016 results on October 22. Net revenue increased 41.6% year-over-year to US$173.3, driven primarily by 55% jump in enrollments. Operating income increased 28.5% year-on-year.
Net income of $0.72 per share (ADS) was way ahead of the Zacks Consensus Estimate of $0.38. The company has delivered a beat in three out of last four quarters, with an average positive quarterly surprise of 23%.
Thanks to strong performance in the first-half, the management now expects net revenue for fiscal year 2016 to grow 40% to 42% in RMB terms, as compared to the 35% revenue growth posted last year.
Chinese Consumer Remains Strong
China’s economy grew 6.9% in the third quarter– its weakest level since 2009—but stronger than the consensus forecast of 6.8%. Some believe that growth trend reflects a steady rebalancing of the world’s second largest economy’s growth model from manufacturing and investments to services and consumption led growth.
Services, which now account for more than 50% of the output, grew 8.6% year-over-year, as Chinese consumers are spending more with rising incomes and still healthy labor market.
In fact, some believe that increasing consumer spending can at least partly offset the slowdown in manufacturing and investments.
Rising Estimates
After strong results, analysts have increased their estimates for the company. Zacks Consensus Estimates for the current and the next fiscal year are now $1.37 per share and $1.49 per share respectively, up from $1.01 and $1.40, before the results.
The Bottom Line
The company has a recognized brand name and a leadership position in a large, attractive and growing market. Private education industry in China has been growing rapidly thanks mainly to rising incomes of the expanding middle class in the country. The industry still has a lot of untapped expansion potential.
The company’s growth strategy focuses on further penetrating existing markets by opening new learning centers as well as entering new markets. In addition to a top Zacks Rank, the stock has a Momentum Style Score of “A” and Growth Style Score of “B”.
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