TEDU Tarena International, Inc.**
Sector financial performance:
This china-based company, who primarily provides IT professional education services in China through live distance instruction and class-based tutoring, has been grouped into IT professional training sector in education industry.
Sales of companies in this sector (China market) seem to grow very quickly in the past several years (41%, 34%, 22%, and 18% for 2015, 2016, 2017, and 2018(1f) respectively based on a typical company data). However, after entering 2018 the growth may be hitting the maximum and may slow down as the new learning centers of those companies did not have enrollment as expected.
As demand for profession IT training services increased quickly as indicated by increased number of enrolled students in the recent years, companies have accelerated expansion of their business such as opening new learning centers and thus caused a declining gross margin (a typical gross margin is currently 66% down from 71%). At the same time, because the SG&A as percentage of sales also went up fast due to increasing spending in marketing and expenses of S&A staffing and more spending in R&D, the typical operating margin among those companies has gone down significantly to about -8% from 14% about four years ago. Therefore, while companies’ income and cash flow still gained a strong growth due to faster increase in sales in 2015 and 2016 while margin down, large loss has been seen since 2017 due to too fast expansion and slowing growth in sales.
According to our analysis, the current companies’ enterprise price/sales ratio is 1.6 with an interest/EBITDA ratio of 0%.
The large increase in revenue and student enrollment seems to come more from increased number of learning center than same center enrollment/capacity of seat in current centers. It seems that the demand for this company’s service and training is very strong and increase quickly in the past several years but signal that the growth may be slowing down in 2018.
The first six months of fiscal 2018 compared with the same period of 2017
Net sales increased by about 14-22% (14% for 2Q) primarily due to increase in kid program and increase of 5-14% (5% for 2Q) in adult enrollments and increase in tuition fees.
Fiscal 2017 compared with 2016
Net sales increased by about 25% primarily due to increase of 20% in student enrollments (kids’ education) and increase in tuition fees.
The first nine months of fiscal 2017 compared with the same period of 2016
Net sales increased by about 22% primarily due to increase in courses enrollments and increase in tuition fees.
Fiscal 2016 compared with 2015
Net sales increased by about 34% primarily due to increase of 28% in student enrollments and increase in tuition fees.
Fiscal 2015 compared with 2014
Net sales increased by about 41% primarily due to increase of 40% in student enrollments and increase in tuition fees.
Due to quick expansion of network ( opening more learning centers) as a driver of enrollment booming, its gross margin (including rental costs and depreciation) went down to a little below 70% in first half of 2017 from 71% since 2014. During the same time, while revenue increased fast, more spending on selling and marketing caused its SG&A as percentage of sales to increase by about 100 basis points and thus caused its operating margin down by about 360 basis points to about 10% in 2017 (based on 12 months trailing data). However, as sales did not grow as fast as expected in 2018, the leverage of huge expenses of learning center related and staffing of sales and general administration, which resulted from previous expansion, dragged down the margin (66% for gross margin and -8% for operating margin) significantly.
This stock currently has a companies’ enterprise price/sales ratio of 1.56 (RMB 58). We think that its stock is being relatively overvalued considering that slower growth in sales cannot even leverage increased expenses in rental and depreciation of learning center related not mention to SG&A expenses.