TAL TAL Education Group
Sector financial performance:
This company, who is primarily a private K-12 after-school tutoring services provider in China, has been grouped into private K-12 after-school tutoring sector in education industry.
Sales of companies in this sector (China market) seem to grow very quickly in the past several years (43%, 67%, 64%, and 71%for 2015, 2016, 2017, 2018 so far respectively) probably driven by the increasing disposable income of family in China and intensive competition of academic performance among K-12 student.
As demand for private after-school tutoring services increased quickly as indicated by increased number of enrolled students, companies have accelerated expansion of their business such as opening new branches in new areas and thus caused a declining gross margin (a typical gross margin was 48% in 2017 down from 53%). Therefore, while SG&A as percentage of sales also went down due to quick increase in sales, the typical operating margin among those companies has gone down to 12% in 2017 from 15% . However, while margin went down companies’ income and cash flow still gain a strong growth due to faster increase in sales during this period. As sales continued to grow we see this company’s gross margin (50% in 2018) was improved benefiting from leverage of rental costs expenses. Therefore, while more spending in marketing (promotions included), we see improved operating margin (13% 2018).
According to our analysis, the current companies’ enterprise price/EBI ratio is 94 with an interest/EBITDA ratio of 5%.
It seems that the demand for tutoring services that this company provides has been very strong and grown quickly in the past several years as indicated by increased sales and student enrollments.
The first quarter of fiscal 2019 compared with the same period of 2018 (ended 20180531)
Net sales increased about 71% primarily due to increase of 88% in student enrollment in the small class and online courses.
Fiscal 2018 compared with 2017(ended 20180228)
Net sales increased about 64% primarily due to increase in student enrollment in the small class and online courses.
The first 6 months of fiscal 2018 compared with the same period of 2017
Net sales increased about 67% primarily due to increase of 86% in student enrollment in the small class and online courses.
Fiscal 2017 compared with 2016
Net sales increased about 67% primarily due to increase of 70% in student enrollment in the small class and online courses.
Fiscal 2016 compared with 2015
Net sales increased about 43% primarily due to increase of 55% in student enrollment in the small class and online courses.
While sales increased fast, the expenses resulted from expansion of branches and learning center increased even faster thus causing its gross margin (including rental costs) to go down by about 520 basis points since 2014 to about 48% of fiscal 2017(trailing 12 months). During the same time, the SG&A as percentage of sales decreased by about 150 basis points due to the leveraging of expenses as a result of fast increased sales. Its operating margin went down to about 12% in 2017 (based on 12 months trailing data). However, as sales continued to grow in 2018, its gross margin finally was able to benefit from leverage of fixed expenses such as rental and improved to about 50% in 2018. And this caused its operating margin reach to 13% with slight increase in SG&A in 2018.
This stock currently has a companies’ enterprise price/cash flow ratio of 94($26). We think that its stock is being relatively undervalued considering improved margin accompanying with continuous trend in student enrollment while large promotions.