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China educati on BNP PARIBAS Gabriel R Chan

24 OCTOBER 2016 SECTOR REPORT

CHINA EDUCATION

Penetration and scalability

Demand drivers: student enrolment growth and market penetration Private education in China is a substantial opportunity. The market was worth cRMB687b/USD102b in

2015 with a large school-age population (307.5m in 2014) and low private sector penetration (17.5%). We expect the market to almost double from 2015 to 2020 to RMB1,283b/USD191b (a 13.3% CAGR) with the most potential in K-12 after-school tutoring (informal education) and formal higher education.

Formal vs informal education: different challenges

Scale is hard to grow in formal education given: 1) competition for ‘relative’ results (ie outperforming peers), 2) long track records required to build brands, and 3) asset-heavy models. On the other hand, informal education providers are scaling up using O2O strategies to penetrate tier-3/4 cities and increase student-teacher ratios. However, low entry barriers and high advertising costs make it hard for informal education providers to even make profit.

Significant growth potential: resuming coverage with positive sector view

We resume coverage with a positive sector view and BUY ratings (in order of preference) on New Oriental (EDU US), TAL (XRS US), Tarena (TEDU US) and China Maple Leaf (1317 HK). We see significant growth potential given rising private sector penetration and supportive government policies. We introduce a China Education Basket of six >USD1b-market-cap stocks with a three-month ADT of >USD2m which has outperformed the MSCI China Index by 104% since the start of 2015.

BNPP recommendations

Note: Priced at close of business 21/10/2016. Share prices and TPs are in listing currency. Sources: FactSet, BNP Paribas estimates

Our research is available on Thomson One, Bloomberg, TheMarkets.com, FactSet and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page.

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CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 52

Gabriel R Chan [email protected] +852 2825 1188

Company BBG code Share price Current Previous Current Previous %change Up/downside

China Maple Leaf Educational 1317 HK 5.77 BUY Suspended 7.70 - - +33.4%

New Oriental Edu EDU US 46.80 BUY Suspended 57.80 - - +23.5%

Tarena Int'l TEDU US 15.05 BUY Suspended 18.30 - - +21.6%

TAL Education Group XRS US 73.25 BUY Suspended 88.50 - - +20.8%

Rating Target price

mailto:[email protected]

CHINA EDUCATION Gabriel R Chan

BNP PARIBAS 24 OCTOBER 2016

Investment thesis

With a large school-age population but low private sector penetration, the education market in China presents significant business and investment potential. We see particularly strong growth potential in the formal higher education and K-12 after-school tutoring segments, due to favourable government policies and rising penetration.

Formal education segments find it hard to scale up given 1) competition for ‘relative’ results, 2) the long track records needed to build brands, and 3) asset-heavy models.

Informal education providers can use O2O technology to penetrate tier-3/4 cities and increase student-teacher ratios, thus enhancing scalability.

In our view, formal education companies have similar business models to hotels, but with less operational risk due to more sustainable branding once established, no seasonality, lower cyclicality and high cash-flow visibility. We think informal education companies have business models more like those of consumer discretionary companies.

Catalyst

1 Changes in policies that allow more flexibility for formal schools to adjust enrolment and tuition fees.

2 Implementation of O2O strategies that improve penetration and scalability of informal education companies.

3 Supportive government policies that increase student enrolment.

Risk to our call

1 Slowing economic growth may impact demand for private education services

2 Changes in parent and student preferences for public over private formal education

3 High land costs that may reduce return on investment and limit expansion potential for formal schools

CONTENTS A growth market with unique opportunities ............................ 3

Penetration: the road to scalability ........................................... 8

Product types dictate scalability .............................................. 12

Strong performances set to continue ...................................... 17

Company reports ......................................................................... 21

Event calendar

Date Event

25 Oct 2016 New Oriental (EDU US) 1Q 2017 Results Announcement

27 Oct 2016 TAL (XRS US) 2Q 2017 Results Announcement

15 Nov 2016 Tarena (TEDU US) 3Q 2016 Results Announcement

28 Nov 2016 Maple Leaf (1317 HK) FY16 Results Announcement

Sources: IDC; Frost & Sullivan; BNP Paribas estimates

Revenues of China education market, 2013-20E

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A growth market with unique opportunities

With a school-age population of 307.5m and low private sector penetration rate of 17.5% across formal pre-school, primary, middle, high-school and higher education in terms of student enrolment (as of 2014), China private education market clearly has substantial growth potential. We estimate it generated total revenue of about RMB687b (USD102b) in 2015, and expect this to almost double to RMB1,283b (USD191b) in 2020, a 13.3% CAGR. We expect growth to be driven by:

1 Increased penetration of the private sector, as demand for better quality education increases alongside rising household incomes in China, making private education affordable to more people, and

2 Supportive government policies, such as allowing private formal education institutions to adjust tuition fees more frequently without approval from relevant authorities, as well as Chinese government initiatives to improve gross enrolment ratios of formal education in pre-school and higher education.

Although the Chinese government spent a relatively large amount on education (c3.6% of GDP in 2014 vs 3.3-5.3% in other developed countries) expenditure per student was a low cRMB33,044 (USD4,910) in 2014 (on a purchasing power parity basis, while the absolute amount was USD1,391) vs USD7,300-10,240 in other developed countries. In order to improve the quality of education, we think China clearly needs to increase funding from the private sector.

Exhibit 1: Revenues of China education market, 2013-20E

Sources: IDC; Frost & Sullivan; BNP Paribas estimates

Exhibit 2: Government expenditure on education as % of GDP, 2014

Exhibit 3: Government expenditure on education per student, 2014 (on a purchasing power parity basis)

Sources: Wind; UNSECO; BNP Paribas estimates Sources: Wind; UNSECO; BNP Paribas estimates

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A highly individualistic market

Education is a special, highly individualistic consumption item. Each teacher and student is unique, and students can achieve vastly different results even if taught the same curriculum by the same teacher. To gauge the growth potential for education service providers, we think it is imperative to understand how scalable their business models are. In this report, we analyse the growth potential of the various formal and informal education segments in terms of market penetration (private sector penetration in formal education and service usage penetration in informal education) and how well providers can replicate success in particular businesses (ie scalability).

Chinese education system – formal vs informal

In China, the education system can be generally categorized into formal and informal education. Formal education comprises fundamental education (pre-school, primary school, middle school and high school, which is also known as K-12), vocational education and higher education. Informal education is mainly after-school tutoring for K-12 students, exam preparation and other vocational training.

Formal education is highly regulated by the government and still dominated by the public sector. Within informal education, many private companies have been set up and private sector participation has blossomed.

Demand for formal primary, middle & high school education essentially satisfied

While the school-age population is indeed large, it has fallen at a 1.9% CAGR over the last 10 years due to the single-child policy, which was only relaxed to a two-child policy at the beginning of 2016.

Exhibit 4: Chinese education system

Source: Ministry of Education

PRC Education system

Formal education

Fundamentaleducation

Secondary vocational education

Higher education Others

Preschools Elementary schools Middle schools High schools

3 years3 years 9 years compulsory education

Adult education

Informal education

4



On the other hand, since China adopted a compulsory education policy in 1986, which guaranteed school-age children the right to receive at least nine years of education (six years of primary school education and three years of middle school education) for free, gross student enrolment ratios (defined as the number of student enrolment divided by the number of school age children) for both primary and middle schools have reached over 100%, while the gross enrolment ratio for high schools has also improved from below 30% in the early 1990s to c90% in recent years.

As such, demand for formal primary, middle and high school education is essentially satisfied, and student enrolments are on a downtrend on the back of declining school-age populations. We believe the trend will continue for another five to six years as the single-child policy was only relaxed at the beginning of 2016.

Exhibit 5: Total school age population, 2004-14

Sources: Ministry of Education; BNP Paribas

Exhibit 6: No of student enrolments in primary schools Exhibit 7: Gross enrolment ratio in primary schools

Source: Ministry of Education Source: Ministry of Education

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Pre-school and higher education have the highest growth potential

Despite the shrinking school age population, student enrolment is growing in the pre-school and higher education segments. These segments have had much lower gross student enrolment ratios in the past. For pre-school education, this was due to the segment not being under the government compulsory education policy. Also, parents in China do not generally put too much emphasis on pre-school education, and in our view, a lot of them do not even consider pre-school as part of formal education. For formal higher education, it had a very low base (a 3.5% gross enrolment rate in 1991) before the Chinese government devoted tremendous effort and resources, resulting in a significantly higher gross enrolment ratio of 37% in 2015.

In the 13th Five Year Plan (FYP) announced in March 2016, the Chinese government set its target gross enrolment ratio to 85% in 2020 for pre-K from 75% currently and to over 50% for higher education from about 37% currently. Nevertheless, we do not see these as the government’s ultimate goals, especially for higher education, as average higher education gross enrolment ratios are higher in Europe (64% in 2015) and North America (87%).

Also, the relaxation of China’s birth policy will likely stimulate population growth, with the pre-school segment benefitting first starting 2019.

Exhibit 8: No of student enrolments in middle schools Exhibit 9: Gross enrolment ratio in middle schools


Exhibit 10: No of student enrolments in high schools Exhibit 11: Gross enrolment ratio in high schools

Sources: Ministry of Education Source: Ministry of Education

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Thus we see the strongest student enrolment growth potential in higher education (driven by an increased gross enrolment ratio), followed by pre-schools (driven by an increased gross enrolment ratio and by population growth). We expect primary, middle and high-school demand to continue declining for six to 12 years (six years for the next ‘batch’ to enter primary school and 12 for them to enter middle school).

Exhibit 12: No of student enrolments in pre-schools Exhibit 13: Gross enrolment ratio in pre-schools


Exhibit 14: No of student enrolments in higher education Exhibit 15: Gross enrolment ratio in higher education


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Penetration: the road to scalability

Formal education – shifting from public to private providers

As mentioned above, demand for formal education in primary and middle school segments, and by and large in the high school segment, is essentially satisfied. Therefore, increased private sector penetration requires students (actually parents, as the ultimate decision makers) to switch from public to private schools. Indeed, there has been a significant increase in private sector penetration across these three segments, as increasing disposable income in China has resulted in a stronger preference for private education by parents and students.

Nevertheless, private education is not cheap. According to Frost & Sullivan, the average private annual tuition and miscellaneous fees per student in China in 2014 were about RMB3,252 (USD483) for pre-schools, RMB3,060 (USD455) for primary schools, RMB4,475 (USD665) for middle schools and RMB7,599 (USD1,129) for high schools, with significant differences between fees among private schools. As such, and without taking inflation into consideration, private formal fundamental education costs parents an extra average RMB64,338 (USD9,560) over a child’s 15 years of fundamental education, compared to minimal costs of sending their child to a public school. This compares with the per capita disposable income of urban households was RMB31,195 (USD4,635) in 2015.

On the supply side, over 2011-14, China saw a gradual rise in the number of private pre-schools (due to relatively low public sector participation), a stable number of private primary and middle schools but a gradual fall in the number of private high schools. Overall, student admissions rose – an important element of scalability.

Exhibit 16: Private sector penetration by number of student enrolments

Source: Frost & Sullivan

Exhibit 17: No of private schools by segment Exhibit 18: No of students per private school

Sources: Wind Sources: Wind

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The situation is somewhat different for higher education. Firstly, the gross enrolment ratio is still low, at around 37.1%. For instance, there were about 15.7m students of college-entry-age in 2015; only around 60% of these took the National Higher Education Entrance Examination; and of those that did, only about 7m students (c74%) were admitted to higher education. That said, unlike primary and middle school education, demand for higher education has not been met by enough supply, despite the increasing number of private higher education institution.

Furthermore, there is a significant salary gap between higher education and high school graduates in China. In 2014, the average monthly salary of a bachelor graduate was RMB3,773 (USD561), 18% higher than that of a higher vocational college graduate (this works out to RMB6,876 (USD1,022) more per annum). The gap is with students without any higher education is even bigger.

In 2015, the average tuition fee in private higher education was about RMB12,000 (USD1,783) per school year, versus RMB6,700 (USD996) in public higher education. This equates to a RMB36,000-48,000 (USD5,349-7,132) extra investment over a three to four year course, which implies a high ROI given the salary gap.

Favourable government policies support private formal education operators

Since the 1980s, the Chinese government, both central and local, has launched a series of policies encouraging development of private educational institutions. For example, the 12th Five-Year Plan for National Economic and Social Development issued by the National People’s Congress in 2011 encouraged private capital to run education and ensured private schools enjoyed the same legal status as public ones.

Exhibit 19: Students admitted to higher education in 2015 Exhibit 20: Number of private higher education institutes

Sources: Ministry of Education; BNP Paribas Sources: Wind

Exhibit 21: Penetration rate of private higher education institutes by no of student enrolments

Exhibit 22: Number of students in private higher education

Source: Wind; BNP Paribas estimates Sources: Wind

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In some regions, local governments have implemented many favourable policies, such as providing free land or financial support for campus building, to attract well-branded private schools to establish local branches.

In Dec 2015, the Standing Committee of the China State Council approved an amendment to The Law for Promoting Private Education that allows private schools to register as for-profit entities and make their own decisions on tuition levels.

Also, in 2013, the Chinese government announced a relaxation of the one-child policy to stimulate birth rates by allowing families to have two children if one parent was an only child. The new law became effective on 1 January 2016. Accordingly, we expect demand for high-quality private education in China to continue growing.

Informal education – non-users are becoming users

As mentioned above, increased penetration in formal education in China essentially means switching from the public to private sector. For informal education, penetration relies on students’ ability to afford private education services.

K-12 after-school tutoring We estimate c18-20% of K-12 students take some after-school tutoring courses, and c36-40% of them subscribe to services from tutoring institutions such as New Oriental (EDU US, BUY) and TAL (XRU US, BUY). China’s primary and secondary tutoring market grew at a 10.8% CAGR over 2009-2014 to cRMB220b (USD32.7b), according to IDC. However, market penetration is still low in China compared to South Korea, where 89%/75%/55% of primary/middle/high school students consumed tutoring services in 2010, according to iResearch.

Based on a study by Tencent in 2014, about 40% of K-12 parents spent over RMB5,000 (USD743) annually per child on supplementary K-12 education (including after-school tutoring) and 15% spent over RMB10,000 (USD1,486) per year.

In our view, parents and students are under the pressure to purchase supplementary services due to the competitiveness of China’s education system, with only c37.1% of college-entry-age children admitted to higher education institutions in 2014.

Furthermore, China’s rapidly rising household disposable income paired with continued economic growth and urbanisation will likely drive demand for informal K-12 education as more families become able to afford higher tuition fees.

Exhibit 23: Primary and secondary school tutoring market

Source: IDC; BNP Paribas estimates

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Professional education services Professional education services are non-degree-granting post-secondary-education programmes focused on professional career advancement. According to IDC, the professional education services market grew from RMB48.8b (USD7.3b) in 2010 to RMB67.5b (USD10.0b) in 2013 and we expect it to grow to RMB115.4b (USD17.1b) in 2017. We expect the mismatch of supply and demand in the labour market (too much labour without the required related knowledge and skillsets) to support growth in demand for professional education services.

In 1998-2008, China experienced a massive enrolment expansion on the back of robust economic development, creating huge demand for talent with higher education and technical skill sets. Nevertheless, with the economic slowdown of recent years and the fact that higher-education curriculums remain primarily research-driven, has led to a mismatch in labour supply and demand. Therefore, many new graduates are not equipped with the necessary skills to take up technical jobs, and are less willing to engage in low-skilled jobs.

The increasing difficulty for fresh gradates to find employment is apparent in the rising proportion of fresh higher education graduates among the young unemployed, which increased from 35% in 2005 to 45% in 2015.

Nevertheless, China is establishing more applied-science-focused higher-education institutions aimed at equipping students with practical and readily applicable knowledge and skillsets for potential employers. As such, we expect demand for private professional education to gradually fall if such courses do indeed lead to improved graduate employment rates.

Exam preparation We see continuous, albeit slower, growth in exam preparation courses. On the one hand, increasing affluence of Chinese families has encouraged more students to study abroad, boosting demand for preparation courses in view of language and entrance exams such as TOEFL, SAT, ACT, GMAT, CET4, CET6.

On the other hand, China’s intensely competitive employment market amid its economic slowdown has stimulated people to earn professional qualifications, spurring demand for professional exam preparations.

Nonetheless, we believe the exam preparation market has relatively high penetration, with most exam-takers having purchased supplementary study materials or taking courses conducted by private education service providers already.

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Product types dictate scalability

As mentioned above, education is a unique consumer service, being highly individualistic. Accordingly, we analyse the challenges of scaling different business models in the context of branding, operations and capital requirements.

Brand building in the education market

To discuss how private service providers can develop a reputable brand, it is essential to understand the nature of education as a product.

Chinese parents are well known for being highly conscious of their children’s education, and for being pragmatic and results-oriented. Their main goal is to help their children onto a good career path.

Studying at a reputable university provides increased opportunities for a good career. To get into a reputable university, one needs to get into a good high school. And so it goes on, even before a child is born. A common adage is that you must ‘win at the starting line’, meaning that children must be well prepared for upcoming competition.

However, there is an important difference between the results required for formal and informal education. Parents and students focus on ‘relative’ results (as explained below) in formal education but ‘absolute’ results in informal education. This makes it harder for formal education institutes to build brands and replicate success.

Formal education is a ‘relative’ competition

As seats at reputable universities are limited in supply, students need to not only achieve good academic results but also outperform his or her peers.

For private formal education service providers, the most important yardsticks that parents and students use to judge service quality are graduate employment rates and average starting salaries for higher education institutions, and reputable schools admission rates for fundamental education institutions.

It is the relative nature of results required that makes brand building and scaling challenging for private formal education service providers since increased scale, up to certain limitations, can dilute the results that are achievable. For example, a high school with 1,000 students may have 20% of students admitted to first tier universities in China, way above the national average of 10%. However, if the school expands to 2,000 students, it will be harder to maintain such high admission rates as the total number of students admitted to first-tier universities is more or less fixed.

There are other challenges in establishing brand recognition for formal education institutions. For example, it requires a long investment period, taking six years for primary schools and three years for middle and high schools to produce their first batch of graduates, not to mention with consistent results, ie, consistently high and/or improving reputable schools admission rates. Furthermore, formal education is often somewhat perceived as non-commercial in nature, so providers rely relatively heavily on word-on-mouth to promote schools rather than more usual advertising. This can limit their reputations to relatively small localities. The upside is that reputation, or brand value, can be very sticky and sustainable once established, supporting a school’s business stability and enhancing its ability to raise tuition fees.

‘Absolute’ results make informal education easier to replicate

In contrast, results required for informal education are more absolute in nature. For example, in exam preparation, consumers care most about passing or failing an exam, and generally pay much less attention to whether they achieve a high score. Even then, failing an exam may lead to students consuming even more services in order to raise their chances of passing the next exam.

For K-12 after-school tutoring, parents normally compare the absolute academic results of a student, like internal and external exams, before and after taking the tutoring classes to assess whether money has been wisely spent. The responsibility of getting students admitted to good schools remains with the formal institution.

12



As such, it is easier for informal education providers to replicate results. On the other hand, the time required to produce results for informal education providers is relatively short, which is also due to the different nature of the results required.

Another salient point is that informal education is mostly supplied by the private sector. It is mostly supplementary to formal education, and perceived as commercial in nature and so accompanied by aggressive marketing and advertising campaigns. New Oriental and TAL Education, for example, increased their selling and market expenses by 39% and 166% on average over the last four financial years, with a combined spending of USD280m (RMB1,880m) in FY16. Also, the private informal education market is highly fragmented; these two companies have a combined market share of less than 5%.

On the other hand, Tarena’s acquisition cost per student enrolment (which includes advertising expenses, marketing expenses and recommendation expenses) is about USD300 (RMB2,012), accounting for about 14% of its average revenue per student enrolment in 2Q16. Selling and marketing costs for online education companies are even higher. For example, China Distance Education (DL US, Not Rated) and China Online Education (COE US, Not Rated) spent 35% and 192% of their revenues, respectively, on selling and marketing efforts in 2015.

Exhibit 24: Selling and marketing expenses and % of revenues of key listed informal education companies

Sources: New Oriental; TAL; BNP Paribas

Exhibit 25: Tarena’s student acquisition cost per enrolment, 1Q13-2Q16

Exhibit 26: DL’s and COE’s selling and marketing expenses as % of revenues, 2013-15

Sources: Tarena; BNP Paribas Sources: China Distance Education; China Online Education; BNP Paribas

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O2O as a means of marketing

With the rapid development of internet- and mobile-related technologies and the widening spectrum of education needs, online education is becoming a new and inevitable trend in private education area in China. Although the learning process cannot be shifted completely to the online education system since traditional learning habits are deeply rooted in Chinese society, particularly for formal education, the growth of online education has been impressive in recent years.

iResearch estimates that online education revenue grew at a 19.4% CAGR in 2010-14 and we project it will grow at a 19.7% CAGR in 2014-18 to RMB204.6b (USD30.4b). iResearch estimates China’s online education market had 60m registered users in 2014, up 20.1% y-y, and is set to hit 133.0m with a CAGR of 22.0% in 2014-18, based on our forecast.

Unlike traditional physical classrooms, which offer a face-to-face learning experience, online education is a form of distance education which, leveraging on technology and audio/visual capabilities, presents and distributes education content through internet-enabled devices transcending location barriers. There are two learning formats, synchronous learning and asynchronous learning.

Synchronous learning is one where teachers and students have real-time simultaneous contact over the internet, like virtual classes, with one teacher delivering a lecture at a scheduled time while students participate at the scheduled time from their home or other preferred location. Compared to synchronous learning, asynchronous learning provides additional flexibility in terms of time when teachers can record videos of lecture and upload them to online learning platforms and students can choose the time and place to view these videos, and subsequently interact with teachers through emails or message boards instead of in real time.

Compared to traditional offline education, online education’s advantages include: 1) breaking geographic restrictions of traditional education to reach a wider addressable student base; 2) providing flexible study schedules for working adults to enhance skillsets or for students to get an edge over peers, 3) delivering content using audio-visual tools and formats to cater to a variety of educational needs, 4) lower costs than offline education for similar courses, and 5) fulfilling the social need of the learner without creating the pressure of ranking and continuous peer comparison.

In our view, professional education service and exam preparation are more suitable for online models due to the highly standardized nature of course content and consumers of these products having more discipline in completing courses as they tend to be more mature. In contrast, K-12 education has higher entry barriers for online education as: 1) the younger students are on the whole less self-motivated and disciplined, 2) the younger students do not understand their needs as well, so face-to-face in-person interaction is necessary to enforce learning, 3) less

Exhibit 27: China online education market size Exhibit 28: China online education market users

Sources: iResearch; BNP Paribas estimates Sources: iResearch; BNP Paribas estimates

15

16

17

18

19

20

21

22

0

50

100

150

200

250

2013 2014 2015E 2016E 2017E 2018E

(%)Market size (LHS)Growth (RHS)

(RMB b)

18

19

20

21

22

23

24

0

20

40

60

80

100

120

140

2013 2014 2015E 2016E 2017E 2018E

(%)(nos. m) No. of market users (LHS)

Growth (RHS)

14



communication between teachers, students and parents may affect retention; and 4) the high tuition fees for online courses are not widely accepted by Chinese parents.

Online-to-offline (O2O) education is a business strategy that education service providers adopt to draw potential customers from online channels to physical schools/learning centres. It is a new marketing solution which connects online and offline education. Through O2O strategies, operators offer 1) promotional and discount activities, like opportunities to experience online trial classes before deciding on offline mode, 2) advertising activities that promote offline education through online mediums, 3) student enrolment or registration services for offline schools/learning centres 4) live consulting services for parents and students, and 5) others services, such as establishing online communities for parents, teachers and students to share resources and exchange information which will improve the company’s brand image with potential customer groups.

Currently, O2O have been mostly adopted in the professional education service and exam preparation segment, and is used as a complementary service to offline courses. We expect investments in O2O/online education for K-12 players to drive offline enrolment rather than profit in the short- to mid-term before scale builds up.

Although it will be tough to digitise K-12 tutoring in the short term, there are still opportunities for online penetration in this space given: 1) K-12 tutoring is an addressable market with massive potential – online education could provide services to areas that physical offline channels have not covered yet or are still underpenetrated, such as tier- 3 and -4 cities; 2) effective O2O platforms could be set up to promote offline courses and attract traffic through online communities, 3) online education could fulfil the learning desires of students without the ability to afford the high tuition fees of offline courses; and 4) online education is a good platform to exchange information and experiences and share educational resources.

According to iResearch, 29.9% of online education took place in tier-3 and below cities in 2015 (up 0.7ppt from 29.2% in 2013) and 39.9% of online education took place in tier-2 cities in 2015 (up 7.4ppt from 32.5% in 2013). The data shows that online education is growing in lower-tier cites, especially tier-2 and -3 cities. Also, the breakdown of investment in China’s online education shows that the K-12 tutoring market is the most attractive spot for investors. In 1H15, the highest portion of online education investment targeted K-12 education (25.8%).

Asset heavy vs asset light

In our view, another distinctive difference between formal and informal education business is that formal education business tends to be much more asset heavy, especially if one wants to gain scalability by having more students within a single campus to enjoy economies of scale. By gradually ramping up student enrolment, a school normally can improve profitability by increasing its student-teacher ratio and cut administration costs per students.

Exhibit 29: China online education breakdown by content Exhibit 30: China online education breakdown by user

Sources: iResearch; BNP Paribas estimates Sources: iResearch; BNP Paribas estimates

18.7 19.4 20 20.3 20.8 21.5

81.3 80.6 80.5 80.2 79.8 78.9

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015E 2016E 2017E 2018E

(%) Language Non-language

60.3 59.2 57.8 55.6 53.6

25.8 25.2 24.6 24.7 25.3

10.2 11.5 13.4 15.3 16.73.5 3.8 3.9 4.1 4.10.2 0.3 0.3 0.3 0.3

0

20

40

60

80

100

2014 2015E 2016E 2017E 2018E

(%)

Pre-school Corporate E-learningPrimary and secondary schools CareerHigher education

15



Some private formal education institutions like Maple Leaf Educations (1317 HK, BUY) cooperate with local governments and third party business entities like property developers to develop new schools and lease campuses. While this asset light strategy (using leased campuses) reduces initial capex and enhances ROE profiles, it also reduces operating leverage and cash flow generation in the long term. Furthermore, as mentioned in previous sections, it takes years for a new formal education institution to establish its reputation. The asset light business model may present long-term sustainability risk, as the school may not be able to find a suitable local for a new campus nearby if the landlord decides to redevelop the site.

On the other hand, the informal education sector normally employs asset light business models. Except their headquarters and some key learning centres, most learning centres and facilities are leased from third parties, which in our view, fits their fast expansion and market penetration business models, particularly with the gradual implementation of O2O strategies, which make student-teacher ratios and teaching staff costs less important in the context of long-term operational leverage.

16



Strong performances set to continue

We resume coverage of the China education sector with a positive view given huge growth potential supported by increasing private sector penetration and supportive government policy. We have BUY ratings in this order of preference on: New Oriental (EDU US), TAL (XRS US), Tarena (TEDU US) and China Maple Leaf (1317.HK).

New Oriental (EDU US, BUY, TP USD57.80)

New Oriental (EDU) is, in our view, in the sweet spot of China’s fast growing education market as one of two leaders in the K-12 after-school tutoring segment, with its overseas test prep business continuing to generate strong cash flows.

We believe implementation of its O2O strategy will strengthen its market dominance by enhancing customer loyalty and improving operating efficiency through product standardization and management centralization. We expect EDU to experience gradual improvement in overall profitability, with its operating margin increasing from c12-13% currently to consistently over 14% in two to three years.

We resume coverage at BUY with a target price of USD57.80 based on our DCF analysis (10.2% WACC, 3% terminal growth rate), implying 28.4x FY5/18 P/E. We believe its valuation premium to peers is justified given EDU’s market lead, high brand equity, much bigger scale operationally than peers, and improving profitability in the longer term with further standardization and integration of operations.

TAL Education (XRS US, BUY, TP USD88.50)

TAL is the other leader in the fast growing K-12 after-school tutoring segment, backed by a strong reputation for high-quality tutoring services nationwide based on 12 years of constant effort.

TAL is in a fast growth phrase driven by aggressive capacity expansion. Classroom capacity rose around 50% in the last two quarters, and is set to continue at this pace for the rest of FY2/17. While profitability will suffer due to the expansion (additional teachers and learning centres will need to ramp up and integration of newly acquired businesses will take time), we believe the benefits of expansion and successful implementation of its O2O strategy will drive operating margins up from FY2/18.

We resume coverage at BUY with target price of USD88.50 based on our DCF analysis (8.1% WACC, 3% terminal growth rate), implying 57.4x FY2/18 P/E. We expect TAL to show stronger revenue growth compared to its peers on the back of its market leadership position, as well as its aggressive capacity expansion plan.

Tarena (TEDU US, BUY, TP USD18.30)

Tarena’s (TEDU) highly competitive training and course offerings are reflected in its high employment rate of over 90% of its students. We think its well-received O2O model, which targets a good segment (self-motivated high-school and college graduates), is the most scalable and replicable among listed peers. In light of the increasingly competitive job market in China, we expect TEDU’s robust student enrolment growth trend to continue.

In the longer term, TEDU needs to diversify course offerings to non-IT subjects, and expand its customer base to K-12 populations. The company has already made some promising progress in this regard, as evidenced the launch of its Tongcheng, Tongmei and Tongchuang programmes over the last 12 months and increasing student enrolments in these new courses.

We resume coverage at BUY with a target price of USD18.30 based on our DCF analysis (12.1% WACC, 3% terminal growth rate). In our view, its scalable O2O model and strong after-sales service in terms of graduate job placement will help sustain its robust growth in the near- to medium-term, while its long-term outlook will depends on its success in diversifying product offerings.

17



China Maple Leaf (1317 HK, BUY, TP HKD7.70)

China Maple Leaf (ML) is the largest international school operator in China in terms of student enrolment. According to Frost & Sullivan, the total student enrolment at international schools in China will grow from 177,400 in 2014 to 244,600 in 2017 and the penetration rate of private schools in the overall fundamental education system in China based on student enrolment will rise from 16.3% in 2013 to 21.9% in 2017.

We expect ML’s net profit to grow at a 17% CAGR in FY8/15-8/18 on the back of: 1) ramping-up utilization rates at existing schools; 2) opening new schools and 3) increased tuition fees. Nevertheless, as new schools will mostly cater for primary and middle-school students, with most under an asset-light model, we expect ML’s operating margin to decline slightly during the period.

We resume coverage of ML with a BUY rating and target price of HKD7.70 based on our DCF model (9.4% WACC and 3% terminal growth rate).

Rationale for using DCF to value China education companies

We believe formal education companies are similar to hotel businesses in the context of asset ‘heaviness’. Once utilization ramps up, they benefit from operating leverage and stable cash flows. However, we see fewer operation risks in formal education compared to hotels on the back of more sustainable branding/reputation once established and essentially no seasonality and lower cyclicality, as formal education is considered a necessity by most parents.

On top of that, switching costs for students are very high (not only in financial terms but also having to adapt to a new environment which may affect academic and other performances). Therefore, once a student is admitted to the school, he or she generates a highly visible cash flow stream for the school over three to six years. As such, we think DCF is the best valuation methodology to value these companies.

Informal education companies, on the other hand, are more like companies in the consumer discretionary sector, being very product- and brand-driven with penetration and expansion depending on new shop or learning centre openings. Nevertheless, given most are in fast growth phrases accompanied by aggressive network expansion, we believe DCF is a fair valuation methodology to capture their future growth potential when they reach maturity.

18



BNPP China Education Basket

To gauge sector performance, we have constructed a basket of education stocks with market caps over USD1b and a three-month average daily turnover over USD2m (six in total), with equal weighting to all. Among these companies, three are in the informal education segment and three are in the formal education segment.

Since the beginning of 2015, the basket generated a return of 97.2%, versus -7.2% return of MSCI China index. Over the 3-/6-/12-month periods our China education basket generated excess return of -5.6/+18.8/+90.5% against the MSCI China index.

Exhibit 31: China Education Basket

Company BBG code Mkt cap YTD avg. turnover Company description

(USD m) (USD m)

Informal Education

New Oriental EDU US 7,337 55.34 New Oriental Education & Technology Group, Inc. offers educational services. The Company offers foreign language training, test preparation courses for admissions and assessment tests in the United States, the PRC and Commonwealth countries, primary and secondary school education, development and distribution of educational content, software and other technology, and online classes.

TAL Education XRS US 5,925 37.90 TAL Education Group provides K-12 after-school tutoring services in China. The Company offers comprehensive tutoring services to K-12 students covering core academic subjects, including mathematics, English, Chinese, physics, chemistry and biology.

Tarena TEDU US 839 3.59 Tarena International, Inc. provides professional education services. The Company specializes in Information Technology (IT) professional education services including classroom training. Tarena International offers its services throughout China.

Formal Education

Virscend Education 1565 HK 1,549 1.95 Virscend Education Company Limited is a K-12 private education company. The Company provides foreign exchange programs, mandates English to be taught, and provides different schools with different focuses.

Maple Leaf 1317 HK 992 10.22 China Maple Leaf Educational Systems Limited is a Chinese international school operator. The Company operates high schools, middle schools and elementary schools across various Chinese cities.

Nord Anglia NORD US 2,285 1.92 Nord Anglia Education Inc provides education, training, and guidance for children and young adults. The School also offers vocational schooling, organizational improvement, guidance, consultancy and support, training services, and more. Nord Anglia Education operates schools around the world.

Priced at close Oct 21 2016 Sources: Bloomberg; BNP Paribas

Exhibit 32: BNPP China education basket vs. MSCI China

Sources: Bloomberg; BNP Paribas

0

50

100

150

200

250

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr-1

6

May

-16

Jun-

16

Jul-1

6

Aug-

16

Sep-

16

Oct

-16

(rebased to 100) BNPP China education basket MSCI China

19



Exhibit 33: Valuation comparison

Company BBG code Reco Price Mkt cap --------- P/E -------- ---- EV/EBITDA --- ------ P/BV ------- ------ ROE --------- ----- Div. yield -----

2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

(LC) (USD m) (x) (x) (x) (x) (x) (x) (%) (%) (%) (%)

Informal Education New Oriental EDU US BUY 46.80 7,337 28.5 23.0 19.6 14.5 4.4 3.7 16.9 17.6 - -

TAL Education XRS US BUY 73.25 5,925 76.3 47.5 40.7 25.6 11.1 8.8 18.2 23.5 - -

Tarena TEDU US BUY 15.05 839 23.2 18.3 13.0 9.5 3.4 2.8 16.8 17.9 - -

China Distance DL US NR 13.30 458 19.3 17.4 14.3 12.6 16.4 17.7 - - 7.0 7.1

China Online Education COE US NR 18.91 379 - - - - - - - - - -

Ambow Education AMBOY YS NR 4.50 277 - - - - - - - - - -

Hailiang Education HLG US NR 8.45 205 17.4 - - - - - - - - -

China Chuanglian 2371 HK NR 0.19 115 - - - - - - - - - -

ATA Inc ATAI US NR 3.74 83 - - - - - - - - - -

HQ Global Education HQGE US NR 0.35 12 - - - - - - - - - -

China Education CEAI US NR 0.01 0 - - - - - - - - - -

China Ivy School CIVS US NR 0.01 0 - - - - - - - - - -

Formal Education Maple Leaf 1317 HK BUY 5.77 992 27.0 22.7 17.5 14.6 3.5 3.3 13.3 14.8 2.1 2.4

Virscend Education 1565 HK NR 3.89 1,549 32.3 26.1 27.3 21.1 4.1 3.7 17.3 14.8 1.5 2.1

China Bilingual CBLY US NR 0.10 3 - - - - - - - - - -

Nord Anglia NORD US NR 21.95 2,285 34.1 32.5 15.1 15.0 7.8 6.7 13.4 16.3 - -

Average 28.2 23.1 17.2 13.1 7.2 6.7 16.0 15.0 3.0 2.4

Priced at close Oct 21 2016 Sources: Bloomberg consensus estimates for non-rated stocks; BNP Paribas estimates for others

20

China M apl e Leaf Educational 1317 H K BNP PARIBAS Hong Kong R esearch Team

24 OCTOBER 2016 HONG KONG / CONSUMER SERVICES

CHINA MAPLE LEAF EDUCATIONAL 1317 HK

Repositioning for growth

KEY STOCK DATA

Sources: FactSet estimates; BNP Paribas estimates

Resume coverage at BUY: capacity growth to drive earnings ML is the largest international school operator in China in terms of student enrolment. We resume cover at BUY with a HKD7.70 target price. We expect strong capacity growth to ensure robust earnings (17% CAGR over FY8/15-18) despite operating margin pressure.

Rebalancing student composition and more asset-light schools Since ML has historically had more students in high schools than other segments, capacity expansion will focus on middle and primary schools. This will allow students to remain in ML facilities for longer, and will help ensure student quality at its high schools. Also, more new schools will be under asset-light models (revenue sharing or with rental payments): of the 12 added in September (42% of new capacity) four are self-owned with the rest under asset light models. Of 17 schools scheduled to open in FY8/18-19, all will be asset light.

Margins may suffer in the near to medium term Tuition fees are lower for primary and middle school students, so ML’s expansion strategy focused on primary and middle schools will hurt margins. We expect its operating margin to drop from 30.5% in FY8/16 to 29.8% in FY8/18. Also, while the increase in asset-light schools will improve ROE, it will also dilute overall operating margins.

HKD7.70 target price based on DCF (9.4% WACC, 3% term g) We value ML at HKD7.70 based on a DCF model with a 9.4% WACC and 3% terminal growth rate. ML added 12 schools in September 2016 increasing capacity by 19% to 35,740 students (FY8/17). We think ML is well positioned to benefit from growing student enrolment and private education penetration in international schools in China.

Gabriel R Chan [email protected]

+852 2825 1188

BUY TARGET PRICE HKD7.70

UP/DOWNSIDE +33.4%

CLOSE HKD5.77

HOW WE DIFFER FROM CONSENSUS MARKET RECS

TARGET PRICE (%) (8.0) POSITIVE 10

EPS 2017 (%) (13.7) NEUTRAL 2

EPS 2018 (%) (24.9) NEGATIVE 0

2015A 2016E 2017E 2018E

Revenue 653 825 1,014 1,214

Rec. net profit 186 248 295 329

Recurring EPS (RMB) 0.15 0.19 0.22 0.25

EPS growth (%) (9.6) 27.4 18.9 11.6

Recurring P/E (x) 34.4 27.0 22.7 20.4

Dividend yield (%) 1.9 2.1 2.4 2.7

EV/EBITDA (x) 18.8 17.5 14.6 12.1

Price/book (x) 3.3 3.5 3.3 3.0

Net debt/Equity (%) (61.9) (62.5) (52.5) (61.3)

ROE (%) 16.3 13.3 14.8 15.5

Share price performance 1 Month 3 Month 12 Month

Absolute (%) (17.9) (30.2) 109.0

Relative to country (%) (17.4) (33.0) 97.2

Next Results

Mkt cap (USD m) 992

3m avg daily turnover (USD m) 11.1

Free float (%) 23

Major shareholder LIANG SHERMAN SHU (54%)

12m high/low (HKD) 8.57/2.56

3m historic vol. (%) 74.2

ADR ticker -

ADR closing price (USD) -

Issued shares (m) 1,329

YE Aug (RMB m)

November 2016

(50)

38

125

213

300

2

4

6

7

9Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

China Maple Leaf Educational Rel to MSCI Hong Kong(HKD) (%)

21

China Maple Leaf Educational 1317 HK Gabriel R Chan


Investment thesis ML is the largest international school operator in China in terms of student enrolment. Frost & Sullivan expects total student enrolment at international schools in China to grow from 177,400 in 2014 to 244,600 in 2017, and the penetration rate of private schools in the overall fundamental education system in China (based on student enrolment) to increase from 16.3% in 2013 to 21.9% in 2017.

We expect ML’s net profit to see a 17% CAGR in FY8/15-8/18 on the back of: 1) ramping up utilisation of existing schools; 2) opening new schools; and 3) increasing tuition fees through more relaxed government policy. Nevertheless, as new schools will cater mostly to primary and middle-school students, with most under asset-light models, we expect ML’s operating margin to decline slightly during the period.

We rate the stock BUY with a target price of HKD7.70, which is based on a DCF model with a 9.4% WACC and 3% terminal growth rate.

Catalyst Key potential share price drivers include: 1) stronger demand for international schools on the back of rising disposable incomes and favourable government policies in China; 2) faster-than-expected ramp up of its new schools; 3) higher-than-expected tuition fee hikes; and 4) announcement of new school development plans.

Risk to our call Rising competition may lead to market share loss and affect ML’s ability to increase tuition fee levels. Failure to renew existing China/BC certifications and to obtain other necessary approvals, licences and permits from the government pose downside risks to our call.

Company background Key assumptions

China Maple Leaf Educational Systems Limited is a Chinese international school operator. It operates 8 high schools, 12 middle schools, 11 elementary schools, 13 preschools and 2 foreign national schools across 11 cities in China.

2016E 2017E 2018E

Student enrolment increase (%) 20.4 16.8 16.9

Average tuition fee increase (%) 5.4 5.3 1.9

Utilisation (%) 63.5 62.4 56.8

New schools (nos.) 6 12 17

Key executives Age Joined Title

Shu Liang Sherman Jen 60 2007 Chairman and Co-CEO Zhenwan Liu 58 2014 ED,President and Co-CEO Jingxia Zhang 57 2008 ED, Senior Vice President and CFO

http://www.mapleleafschools.com Source: BNP Paribas estimates

Principal activities (revenue, 2015) Earnings sensitivity

-------- Bull -------- ------- Base ------- ------- Bear -------

FY16E FY17E FY16E FY17E FY16E FY17E

Average tuition fee (RMB) 40,008 42,141 36,371 38,310 32,734 34,479

Change (%) 10.0 10.0 - - (10.0) (10.0)

Student enrolment 21,288 24,858 19,353 22,598 17,418 20,338

Change (%) 10.0 10.0 - - (10.0) (10.0)

Teaching staff cost (RMB m) 229 278 254 309 280 339

Change (%) (10.0) (10.0) - - 10.0 10.0

Gross profit (RMB m) 555 682 407 507 262 320

Gross margin (%) 58.0 57.4 49.3 50.0 39.0 38.4

Source: China Maple Leaf Source: BNP Paribas estimates

Event calendar

Date Event

28 Nov 2016 FY16 Results announcement

A 10% change in student enrolments/average tuition fees and 10% decrease in teaching staff costs, all else being equal, could change our FY16E and FY17E gross profit by 36.3/(35.6)% and 34.5/(36.9)% respectively.

A 10% change in student enrolments/average tuition fees and 10% decrease in teaching staff costs, all else being equal, could change our FY16E and FY17E gross margin by 8.7/(10.3)ppt and 7.4/(11.6)ppt respectively.

High school tuition - 49.6%

Middle school tuition - 15.0%

Elementary school tuition - 14.5%

Foreign national school tuition - 2.5%

Preschool tuition - 3.9%

Textbooks - 4.3%

Summer and winter camp - 5.4%

Other educational services - 4.9%

22



Repositioning for future growth

ML is the largest international school operator in China in terms of student enrolment. Frost & Sullivan estimates total student enrolment at international schools in China will grow from 177,400 in 2014 to 244,600 in 2017, and the penetration rate of private schools in the overall fundamental education system in China based on student enrolment is expected to increase from 16% in 2013 to 22% in 2017.

We expect ML’s net profit to see a 17% CAGR in FY8/15-8/18 on the back of: 1) ramping up utilisation of existing schools; 2) opening new schools; and 3) increasing tuition fees through more relaxed government policy. Nevertheless, as new schools will cater mostly to primary and middle-school students, with most of them under the asset-light model, we expect ML’s operating margin to decline slightly during the period.

Rebalancing student composition, increasing the number of asset light schools

ML plans to develop more middle and primary schools around the locations of its high schools, to serve as feeder schools. In our view, this strategy could increase ML’s earnings visibility, by having students studying at its schools for a longer period, as well as maintain its reputation in terms of university admissions, as it can recruit better-educated high-school students from its other schools. For instance, among the 29 new schools scheduled to open in FY8/17-19, only two are high schools, one of which is in Canada so that its students can pursue overseas studies.

ML’s expansion plan has shifted from self-owned to an asset-light model. For instance, of the 29 new schools scheduled to open in FY8/17-19, only four will be owned by ML. In our view, the asset light model can speed up the pace of expansion and help ML gain market share in a shorter period of time, as well as limit the pressure on its cash flow.

In our view, the above strategies should sustain strong earnings momentum for ML in the near to medium term, but will also drag down profitability, at least initially. Tuition fees are lower for primary and middle school students, thereby hitting margins, and while the increase in asset-light schools will improve ROE, it will also dilute its overall operating margin.

Exhibit 1: Expansion plan Exhibit 2: Total capacity (number of students), 2013-18E

Source: Maple Leaf Sources: Maple Leaf; BNP Paribas estimates

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2013 2014 2015 2016E 2017E 2018E

(nos.)

23



Resume coverage with a BUY rating

Although we anticipate pressure on ML’s operating margin, we believe its strong capacity growth will ensure robust earnings growth, with a 17% CAGR over FY8/15-18E. With this note, Gabriel Chan assumes primary coverage of Maple Leaf with a BUY rating and target price of HKD7.70, which is based on a DCF model with a 9.4% WACC and 3% terminal growth rate. Our target price also implies a target valuation of 30.2x FY8/17E P/E.

Exhibit 3: Number of student enrolments, 2013-2018E Exhibit 4: Total revenues and operating margins, 2013-2018E

Sources: Maple Leaf; BNP Paribas estimates Sources: Maple Leaf; BNP Paribas estimates

0

5,000

10,000

15,000

20,000

25,000

30,000

2013 2014 2015 2016E 2017E 2018E

(nos.)

23

24

25

26

27

28

29

30

31

32

0

200

400

600

800

1,000

1,200

1,400

2013 2014 2015 2016E 2017E 2018E

(%)(RMB m) Total revenues (LHS)

Operating margins (RHS)

24



Exhibit 5: DCF calculation

(HKD m) ---------- Medium-term assumptions ---------- Discounted cash flow 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E T Val.

Total revenues 346 413 471 540 653 825 1,014 1,214 1,374 1,524 1,661 1,810 1,973 2,151 2,345 Growth (y-y %) 19.5 14.0 14.7 20.9 26.3 23.0 19.7 13.2 10.9 9 9 9 9 9

Profits before interest and tax 108 129 125 139 174 252 312 361 454 505 465 507 553 602 656 Taxation (9) (10) (9) (11) (9) (13) (22) (33) (55) (61) (56) (61) (66) (72) (79) Depreciation & amortisation 28 29 34 39 46 49 58 67 72 78 82 87 91 95 100 CAPEX (130) (93) (200) (111) (212) (148) (152) (182) (206) (229) (240) (252) (265) (278) (292) Changes in working capital 94 51 84 145 205 68 223 239 190 180 249 272 296 323 352 Minority interests - - - - - - - - - - - - - - - Free cash flow 91 106 34 201 204 208 419 453 456 475 501 552 608 670 738 11,830

Years 1 2 3 4 5 6 7 8 9 10

PV of free cash flow 383 378 348 331 319 322 324 326 328 4,807

WACC and terminal value assumptions

Sum of PV 3,059 Terminal value 4,807 Enterprise value 7,866 Net cash/(debt) 979 Equity value (RMB m) 8,845 Equity value (HKD m) 10,260 Fair value (HKD) 7.72

WACC (%) 9.4 Risk free rate (%) 2.9 Market risk premium (%) 6.1 Equity beta (x) 1.25 Cost of equity (%) 10.5 Cost of debt (%) 3.0 Adjusted Effective tax rate (%) 9.0 Terminal growth rate (%) 3.0 Debt / (Debt+Equity) (%) 14.1

Sources: Maple Leaf; BNP Paribas estimates

25




Company BBG code Reco Price Mkt cap ------- P/E ------- Earnings

CAGR PEG -- EV/EBITDA -- ------- P/BV ------- ------- ROE ------- ---- Div. yield ----

2016E 2017E ‘16E-18E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

(LC) (USD m) (x) (x) (%) (x) (x) (x) (x) (x) (%) (%) (%) (%)

Maple Leaf 1317 HK BUY 5.77 992 27.0 22.7 15.2 1.6 17.5 14.6 3.5 3.3 13.3 14.8 2.1 2.4

Informal Education New Oriental EDU US BUY 46.80 7,337 28.5 23.0 22.4 1.0 19.6 14.5 4.4 3.7 16.9 17.6 - -

TAL Education XRS US BUY 73.25 5,925 76.3 47.5 50.4 0.9 40.7 25.6 11.1 8.8 18.2 23.5 - -

China Distance DL US NR 13.30 458 19.3 17.4 7.7 2.3 14.3 12.6 16.4 17.7 - - 7.0 7.1

Tarena TEDU US BUY 15.05 839 23.2 18.3 23.9 0.8 13.0 9.5 3.4 2.8 16.8 17.9 - -

Formal Education Virscend Education 1565 HK NR 3.89 1,549 32.3 26.1 41.4 0.6 27.3 21.1 4.1 3.7 17.3 14.8 1.5 2.1

Nord Anglia NORD US NR 21.95 2,285 34.1 32.5 24.1 1.3 15.1 15.0 7.8 6.7 13.4 16.3 - -

Average 35.6 27.5 1.2 21.7 16.4 7.9 7.2 16.5 18.0 4.3 4.6

Priced at close 21 Oct 2016 Sources: Bloomberg consensus estimates for non-rated stocks; BNP Paribas estimates for others

26



Financial statements China Maple Leaf Educational

Sources: China Maple Leaf Educational; BNP Paribas estimates

Profit and Loss (RMB m) Year Ending Aug 2014A 2015A 2016E 2017E 2018E

Revenue 540 653 825 1,014 1,214

Cost of sales ex depreciation (270) (311) (370) (451) (543)

Gross profit ex depreciation 271 342 455 564 671Other operating income 4 46 15 15 15

Operating costs (96) (124) (155) (195) (244)

Operating EBITDA 178 264 315 384 442Depreciation (35) (43) (48) (57) (66)

Goodwill amortisation 0 0 0 0 0

Operating EBIT 143 221 267 327 376Net financing costs (14) 4 3 (2) (6)

Associates 0 0 0 0 0

Recurring non operating income 0 0 0 0 0

Non recurring items (80) (8) (8) (8) (8)

Profit before tax 48 217 262 317 362Tax (8) (11) (14) (22) (33)

Profit after tax 40 206 248 295 329Minority interests 0 0 0 0 0

Preferred dividends 0 0 0 0 0

Other items 0 0 0 0 0

Reported net profit 40 206 248 295 329Non recurring items & goodwill (net) 87 (20) 0 0 0

Recurring net profit 127 186 248 295 329

Per share (RMB)

Recurring EPS * 0.16 0.15 0.19 0.22 0.25

Reported EPS 0.05 0.17 0.19 0.22 0.25

DPS 0 0.10 0.10 0.12 0.14

Growth

Revenue (%) 14.7 20.9 26.3 23.0 19.7

Operating EBITDA (%) 12.0 47.8 19.6 21.8 15.1

Operating EBIT (%) 10.4 54.4 20.8 22.6 15.0

Recurring EPS (%) 19.4 (9.6) 27.4 18.9 11.6

Reported EPS (%) 20.7 229.2 9.3 18.9 11.6

Operating performance

Gross margin inc depreciation (%) 43.5 45.7 49.3 50.0 49.9

Operating EBITDA margin (%) 33.0 40.4 38.2 37.9 36.4

Operating EBIT margin (%) 26.5 33.8 32.3 32.2 31.0

Net margin (%) 23.6 28.5 30.1 29.1 27.1

Effective tax rate (%) - - - - -

Dividend payout on recurring profit (%) 0.0 64.8 55.6 55.6 55.6

Interest cover (x) 10.1 n/a n/a 185.5 60.8

Inventory days 0.0 0.8 1.5 1.5 1.5

Debtor days 0.0 0.0 0.0 0.0 0.0

Creditor days 614.7 680.0 694.1 673.6 677.7

Operating ROIC (%) 36.2 43.7 54.4 72.9 117.0

ROIC (%) 21.5 29.1 34.8 35.0 36.6

ROE (%) 28.8 16.3 13.3 14.8 15.5

ROA (%) 7.3 7.5 8.4 8.8 8.6*Pre exceptional pre-goodwill and fully diluted

Revenue By Division (RMB m) 2014A 2015A 2016E 2017E 2018E

High school tuition 288 322 405 476 535

Middle school tuition 79 97 119 174 230

Elementary school tuition 60 94 137 162 192

Foreign national school tuition 15 16 17 23 36

Preschool tuition 25 25 26 30 39

Textbooks 23 28 33 40 48

Summer and winter camp 25 35 44 55 69

Other educational services 25 31 38 45 54

27



Financial statements China Maple Leaf Educational

Sources: China Maple Leaf Educational; BNP Paribas estimates

Cash Flow (RMB m) Year Ending Aug 2014A 2015A 2016E 2017E 2018E


Depreciation 35 43 48 57 66

Associates & minorities 0 0 0 0 0

Other non-cash items 9 3 14 (21) 33

Recurring cash flow 172 232 311 331 429Change in working capital 93 168 85 171 180

Capex - maintenance 0 0 0 0 0

Capex - new investment (111) (212) (148) (152) (182)

Free cash flow to equity 154 187 248 350 427Net acquisitions & disposals 0 (36) 0 0 0

Dividends paid 0 (27) (138) (164) (183)

Non recurring cash flows (155) 9 0 (338) 0

Net cash flow (1) 133 110 (152) 243Equity finance 0 761 0 0 0

Debt finance (52) (224) 0 338 0

Movement in cash (52) 671 110 186 243

Per share (RMB)

Recurring cash flow per share 0.22 0.19 0.23 0.25 0.32

FCF to equity per share 0.20 0.16 0.19 0.26 0.32

Balance Sheet (RMB m) Year Ending Aug 2014A 2015A 2016E 2017E 2018E

Working capital assets 29 33 42 52 62

Working capital liabilities (739) (982) (1,059) (1,292) (1,541)

Net working capital (710) (949) (1,017) (1,240) (1,479)Tangible fixed assets 1,219 1,398 1,498 1,593 1,710

Operating invested capital 509 449 481 354 232Goodwill 2 12 12 56 56

Other intangible assets 1 1 1 1 0

Investments 0 58 58 396 396

Other assets 216 191 191 190 189

Invested capital 727 712 743 996 872Cash & equivalents (542) (1,122) (1,201) (1,417) (1,687)

Short term debt 224 0 0 338 338

Long term debt * 0 0 0 0 0

Net debt (319) (1,122) (1,201) (1,079) (1,349)Deferred tax 19 22 22 22 22

Other liabilities 559 0 0 0 0

Total equity 467 1,812 1,923 2,054 2,200

Minority interests 0 0 0 0 0

Invested capital 727 712 743 996 872

Per share (RMB)

Book value per share 0.61 1.51 1.45 1.55 1.66

Tangible book value per share 0.60 1.50 1.44 1.50 1.61

Financial strength

Net debt/equity (%) (68.2) (61.9) (62.5) (52.5) (61.3)

Net debt/total assets (%) (15.9) (39.8) (40.0) (29.1) (32.9)

Current ratio (x) 0.6 1.2 1.2 0.9 0.9

CF interest cover (x) 19.7 n/a n/a 285.8 99.4

* includes convertables and preferred stock which is being treated as debt

Valuation 2014A 2015A 2016E 2017E 2018E

Recurring P/E (x) * 31.1 34.4 27.0 22.7 20.4

Recurring P/E @ target price (x) * 41.4 45.8 35.9 30.2 27.1

Reported P/E (x) 97.1 29.5 27.0 22.7 20.4

Dividend yield (%) 0.0 1.9 2.1 2.4 2.7

P/CF (x) 22.7 26.2 21.5 20.2 15.6

P/FCF (x) 25.3 32.4 27.0 19.2 15.7

Price/book (x) 8.3 3.3 3.5 3.3 3.0

Price/tangible book (x) 8.4 3.4 3.5 3.4 3.1

EV/EBITDA (x) 20.0 18.8 17.5 14.6 12.1

EV/EBITDA @ target price (x) 27.2 26.3 24.5 20.4 17.1

EV/invested capital (x) 4.9 6.9 7.4 5.6 6.1* Pre exceptional & pre-goodwill and fully diluted

28

New Ori ental Edu EDU U S BNP PARIBAS Hong Kong R esearch Team

24 OCTOBER 2016 CHINA / CONSUMER SERVICES

NEW ORIENTAL EDU EDU US

Market leader changes tack

KEY STOCK DATA


Resuming coverage at BUY: extending market lead via O2O EDU is the largest provider of private educational services in China. As with TAL, we believe EDU is in the sweet spot of China’s fast-growing education market. We think the implementation of its O2O strategy will strengthen its market leadership and improve its profitability in the longer term through standardisation and centralisation.

O2O strategy to enhance customer loyalty Historically, EDU’s expansion strategy has relied on recruiting individual leaders in local markets, with minimal input from its headquarters. While the resulting flexibility helped drive expansion, it created key person risk at a local level. Through its O2O strategy, EDU has standardised teaching materials and reduced reliance on individual, star teachers. The system enables students and parents to keep track of learning progress instantly, and enables EDU to tailor supporting material and exercises for students to improve performances in their weakest subjects. We think the O2O system enhances customer loyalty and thus improve retention rates.

1QFY5/17: summer promotion may impact margins We forecast 1QFY5/17 revenue of USD520m and GAAP net profit of USD132m. EDU extended its summer promotions to 30 cities this year, with about 200,000 students enrolled. While this will inevitably impact EDU’s margin in the short term, a key indicator in the results is the retention ratio of these students on regular-priced courses.

USD57.00 target price based on DCF (10.2% WACC, 3% term g) We value EDU at USD57.80 based on our DCF analysis (10.2% WACC, 3% terminal growth rate). We expect overall profitability to gradually improve, with its operating margin increasing from about 12-13% currently to consistently over 14% in two to three years.


+852 2825 1188

BUY TARGET PRICE USD57.80

UP/DOWNSIDE +23.5%

CLOSE USD46.80


TARGET PRICE (%) 13.3 POSITIVE 13

EPS 2017 (%) (0.4) NEUTRAL 3

EPS 2018 (%) (2.0) NEGATIVE 0

2016A 2017E 2018E 2019E

Revenue 1,478 1,733 2,045 2,485

Rec. net profit 225 259 320 387

Recurring EPS (USD) 1.43 1.64 2.03 2.46

EPS growth (%) 16.4 15.0 23.8 20.9

Recurring P/E (x) 32.8 28.5 23.0 19.0

Dividend yield (%) 0.0 0.0 0.0 0.0

EV/EBITDA (x) 23.4 19.6 14.5 10.9

Price/book (x) 5.2 4.4 3.7 3.1

Net debt/Equity (%) (112.6) (110.9) (112.6) (114.8)

ROE (%) 17.1 16.9 17.6 17.8


Absolute (%) (0.6) 5.4 85.6

Relative to country (%) 0.4 6.6 75.0

Next Results

Mkt cap (USD m) 7,337


Free float (%) 84

Major shareholder Tigerstep Development Ltd (15%)

12m high/low (USD) 48.35/24.98


ADR ticker -


Issued shares (m) 157

YE May (USD m)

October 2016

(10)

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New Oriental Edu Rel to S&P 500 INDEX(USD) (%)

29

New Oriental Edu EDU US Gabriel R Chan


Investment thesis In our view, EDU is in the sweet spot of the fast-growing education market in China as one of the two leaders in the K-12 after-school tutoring segment, with its overseas test prep business continuing to generate strong cash flow for the company.

We believe implementation of the O2O strategy will further strengthen its market dominance by enhancing customer loyalty, and at the same time improve its operating efficiency through product standardisation and management centralisation. We expect EDU to experience a gradual improvement in overall profitability, with its operating margin increasing from about 12-13% currently to consistently over 14% in two to three years’ time.

We rate EDU BUY with a target price of USD57.80, which is based on our DCF analysis (10.2% WACC, 3% terminal growth rate), implying 28.4x FY5/18E P/E. We believe the valuation premium to peers is justified given EDU’s market leader position, higher brand equity and much bigger scale operationally, as well as its improving profitability outlook longer term.

Catalyst The key potential growth drivers include: 1) strong enrolment retention rate from the summer promotion programme; 2) successful implementation of the O2O strategy to drive market share gains and operational efficiency; 3) penetration into new cities; and 4) increasing demand for K-12 after-school tutoring services.

Risk to our call EDU may face 1) intensifying competition from peers, 2) weakened ability to increase tuition fees and student enrolment, and 3) RMB depreciation (given USD denominated financial statements).


The largest provider of private educational services in China. The business of New Oriental includes pre-school education, general courses for students of various age levels, online education, overseas study consulting, and textbook publishing.

2017E 2018E 2019E

Blended ASP increase (%) 0.1 2.0 4.5

Number of students enrolled ('000) 4,266 4,939 5,745


Michael Minhong Yu 52 2001 CEO/Founder Louis T Hsieh 50 2009 Director/President Chenggang Zhou 53 2010 Director, Executive President

http://english.neworiental.org Source: BNP Paribas estimates


-------- Bull -------- ------- Base ------- ------- Bear -------


Average tuition fee (USD) 447 455 406 414 365 373

Change (%) 10.0 10.0 - - (10.0) (10.0)

Student enrolment (in '000) 4,693 5,433 4,266 4,939 3,840 4,445

Change (%) 10.0 10.0 - - (10.0) (10.0)

Gross profit (USD m) 1,327 1,574 1,031 1,229 771 923

Gross margin (%) 63.2 63.7 59.5 60.1 55.0 55.7

Source: New Oriental Edu Sources: New Oriental Edu; BNP Paribas estimates

Event calendar

Date Event

25 Oct 2016 1Q2017 Results announcement

A 10% change in student enrolments/average tuition fees, all else being equal, could change our FY17E and FY18E gross profit by 28.6/(25.3)% and 28.1/(24.9)% respectively.

A 10% change in student enrolments/average tuition fees, all else being equal, could change our FY17E and FY18E gross margin by 3.7/(4.5)ppt and 3.6/(4.4)ppt respectively.

Language training and test preparationcourses - 83.8%

Primary and secondary education - 2.0%

Others - 14.2%

30



Margin expansion on the way

In our view, EDU is in the sweet spot of the fast-growing education market in China, being one of the two leaders in the K-12 after-school tutoring segment, with its overseas test prep business continuing to generate strong cash flow for the company.

We believe implementation of the O2O strategy will further strengthen its market dominance by enhancing customer loyalty, and at the same time improve its operating efficiency through product standardisation and management centralisation. We expect EDU to experience a gradual improvement in overall profitability, with its operating margin increasing from about 12-13% currently to consistently over 14% in two to three years’ time.

Three levels of online ecosystem to drive expansion and profitability

EDU has a three-level online strategy. The first level, also the core of its online ecosystem, is an O2O two-way interactive education system across all business lines, which allows students and their parents to keep track of their learning progress instantly and enables EDU to tailor the supporting material and exercises for each student to improve areas in which they show weaknesses. The system can also help EDU to standardise its product offering and centralise operational control, which in our view will result in better operating efficiency and reduce the risk of staff turnover at local operating units.

The system has been launched in most cities in which EDU operators for its K-12 programmes, and some of the cities for other programmes, such as overseas test prep. We expect it to be rolled out to all of EDU’s programmes across all cities by the end of FY5/17.

The second level of EDU’s online strategy is the pure online learning platform that includes several products, such as Koolearn.com, which registered USD12.8m of revenue (+42% y-y) in FY5/16, with an 18% y-y increase in the number of paid-users, Koo.cn, an online broadcast open platform for new entrant and third-party teachers, which achieved over 827,200 registration in 4QFY5/16, and DONUT, a series of game-based mobile learning apps for children with over 41.3m cumulated downloads by end-4QFY5/16, as well as other websites and apps.

The third level of EDU’s online strategy is through investment in minority stakes of online education companies that can complement EDU’s online offering and facilitate its O2O integration.

1QFY5/17 results preview

We forecast 1QFY5/17 revenue of USD520m and GAAP net profit of USD132m. EDU extended its summer promotion program to 30 cities this year, with about 200,000 students enrolled. While this will inevitably impact EDU’s margin short term, the key indicator to watch in the upcoming results will be the retention ratio of these students on regular-priced courses, which will provide an indication of the business outlook for the next two quarters.

1Q has historically been the strongest quarter for EDU, as this is the high season for overseas test prep. However, K-12 after-school tutoring has recently become EDU’s biggest revenue contributor, and its high season is in 3Q-4Q, so we expect EDU’s earnings seasonality to change gradually, with 2Q remaining the weakest quarter but the difference narrowing between 1Q, 3Q and 4Q.

Resume coverage with a BUY rating

We are resuming coverage of EDU with BUY and a target price of USD57.80, which is based on our DCF analysis (10.2% WACC, 3% terminal growth rate), which implies 28.4x FY5/18E P/E. In our view, EDU is in the sweet spot in the fast-growing education market in China, with the implementation of its O2O strategy strengthening its market leadership position and further standardisation centralisation of its operations improving its profitability in the longer term.

31



Exhibit 1: Operating profit and margin, 2013-2019E Exhibit 2: 12-month forward P/E bands

Sources: New Oriental; BNP Paribas estimates Sources: Bloomberg; BNP Paribas estimates


(USD m) ---------- Medium-term assumptions ---------- Discounted cash flow 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E T Val.

Total revenues 540 753 960 1,139 1,247 1,478 1,733 2,045 2,485 3,034 3,489 4,013 4,615 5,307 6,103 Growth (y-y %) 43.8 39.5 27.4 18.7 9.5 18.6 17.2 18.0 21.5 22.1 15.0 15.0 15.0 15.0 15.0

Profits before interest and tax 96 120 123 194 154 195 228 291 357 432 489 562 646 743 854 Taxation (7) (9) (12) (21) (18) (27) (33) (44) (55) (67) (76) (87) (100) (115) (132) Depreciation & amortisation 17 26 39 44 47 49 54 61 69 78 82 87 93 98 104

CAPEX (49) (72) (61) (32) (55) (64) (65) (70) (75) (80) (90) (100) (112) (125.88) (141)

Changes in working capital 86 73 80 84 121 226 15 78 107 218 209 241 277 318 366 Minority interests 0 - - - 0 (0) - - - - Free cash flow 142 139 168 269 248 377 198 317 403 580 615 703 803 919 1,051 14,998

Years 1 2 3 4 6 7 8 9 10 11



Sum of PV 2,981 Terminal value 5,142 Enterprise value 8,124 Net cash/(debt) 971 Equity value (USD m) 9,095 Fair value (USD) 57.78


Sources: New Oriental; BNP Paribas estimates

0

2

4

6

8

10

12

14

16

18

20

0

50

100

150

200

250

300

350

400

2013 2014 2015 2016 2017E 2018E 2019E

(%)(USD m) Operating profit (LHS)

Operating margin (RHS)

0

5

10

15

20

25

30

35

40

45

50

Jan-12 Aug-12 Mar-13 Oct-13 May-14Dec-14 Jul-15 Feb-16 Sep-16

(x)

25x

10x

20x

15x

30x

32





CAGR PEG -- EV/EBITDA -- ------ P/BV ------ ------- ROE ------- ---- Div. yield ----

2016E 2017E ‘16E-18E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

(LC) (USD m) (x) (x) (%) (x) (x) (x) (x) (x) (%) (%) (%) (%)

New Oriental EDU US BUY 46.80 7,337 28.5 23.0 22.4 1.0 19.6 14.5 4.4 3.7 16.9 17.6 - -

Informal Education TAL Education XRS US BUY 73.25 5,925 76.3 47.5 50.4 0.9 40.7 25.6 11.1 8.8 18.2 23.5 - -




Maple Leaf 1317 HK BUY 5.77 992 27.0 22.7 15.2 1.6 17.5 14.6 3.5 3.3 13.3 14.8 2.1 2.4


Average 34.4 26.8 1.2 21.1 16.1 7.2 6.7 16.0 17.5 3.5 3.9


33



Financial statements New Oriental Edu

Sources: New Oriental Edu; BNP Paribas estimates

Profit and Loss (USD m) Year Ending May 2015A 2016A 2017E 2018E 2019E

Revenue 1,247 1,478 1,733 2,045 2,485


Gross profit ex depreciation 767 911 1,084 1,289 1,571Other operating income 0 0 0 0 0

Operating costs (567) (665) (804) (938) (1,146)



Operating EBIT 154 199 228 291 357Net financing costs 67 68 75 86 102



Non recurring items 0 0 0 0 0


Profit after tax 194 230 259 320 387Minority interests 0 (0) 0 0 0


Other items (2) (4) 0 0 0

Reported net profit 193 225 259 320 387Non recurring items & goodwill (net) 0 0 0 0 0


Per share (USD)

Recurring EPS * 1.23 1.43 1.64 2.03 2.46

Reported EPS 1.23 1.43 1.65 2.04 2.47

DPS 0.40 0 0 0 0

Growth

Revenue (%) 9.5 18.6 17.2 18.0 21.5

Operating EBITDA (%) (17.0) 22.9 13.9 25.2 21.0

Operating EBIT (%) (22.3) 29.5 14.5 27.8 22.5

Recurring EPS (%) (10.2) 16.4 15.0 23.8 20.9

Reported EPS (%) (10.8) 16.3 15.0 23.8 20.9





Net margin (%) 15.5 15.2 14.9 15.7 15.6

Effective tax rate (%) 11.9 14.0 14.5 15.0 15.5


Interest cover (x) n/a n/a n/a n/a n/a

Inventory days 17.6 16.5 16.3 16.1 15.7

Debtor days 1.0 1.0 0.9 0.9 0.9

Creditor days 10.1 12.6 12.9 12.8 12.5

Operating ROIC (%) 88.8 91.0 85.3 105.9 133.7

ROIC (%) 33.0 34.4 41.0 51.5 64.0

ROE (%) 17.2 17.1 16.9 17.6 17.8


Revenue By Division (USD m) 2015A 2016A 2017E 2018E 2019E

Language training and test preparation courses 1,040 1,239 0 0 0

Primary and secondary education 27 30 0 0 0

Others 180 210 0 0 0

34



Financial statements New Oriental Edu

Sources: New Oriental Edu; BNP Paribas estimates

Cash Flow (USD m) Year Ending May 2015A 2016A 2017E 2018E 2019E



Associates & minorities (0) 0 0 0 0

Other non-cash items 16 20 1 1 1


Capex - maintenance - - - - -


Free cash flow to equity 319 453 262 389 489Net acquisitions & disposals - - - - -

Dividends paid 0 (63) 0 0 0

Non recurring cash flows (118) (245) 0 0 0

Net cash flow 201 145 262 389 489Equity finance 15 72 0 0 0

Debt finance 0 0 0 0 0

Movement in cash 156 214 262 389 489

Per share (USD)



Balance Sheet (USD m) Year Ending May 2015A 2016A 2017E 2018E 2019E


Working capital liabilities (224) (271) (286) (325) (379)

Net working capital (76) (17) (14) (28) (47)Tangible fixed assets 231 238 250 260 267



Investments 344 198 198 198 198

Other assets 12 37 37 37 37

Invested capital 526 468 483 477 464Cash & equivalents (1,201) (1,615) (1,877) (2,267) (2,755)



Net debt (1,201) (1,615) (1,877) (2,267) (2,755)Deferred tax 2 2 2 2 2


Total equity 1,220 1,405 1,663 1,983 2,370



Per share (USD)



Financial strength

Net debt/equity (%) (98.2) (112.6) (110.9) (112.6) (114.8)


Current ratio (x) 6.0 6.9 7.5 7.9 8.1

CF interest cover (x) n/a n/a n/a n/a n/a


Valuation 2015A 2016A 2017E 2018E 2019E

Recurring P/E (x) * 38.1 32.8 28.5 23.0 19.0


Reported P/E (x) 37.9 32.6 28.4 22.9 19.0

Dividend yield (%) 0.9 0.0 0.0 0.0 0.0

P/CF (x) 28.7 25.1 23.5 19.2 16.1

P/FCF (x) 23.0 16.2 28.0 18.8 15.0

Price/book (x) 6.0 5.2 4.4 3.7 3.1


EV/EBITDA (x) 30.6 23.4 19.6 14.5 10.9



35

TAL Education Gr oup XRS US BNP PARIBAS Hong Kong R esearch Team

24 OCTOBER 2016 UNITED STATES / CONSUMER SERVICES

TAL EDUCATION GROUP XRS US

In a sweet spot

KEY STOCK DATA


Resumption of coverage at BUY: a strong market leader TAL is a leader in China’s K-12 after-school tutoring and so in the sweet spot of a fast growing education market. We resume coverage at BUY with a USD88.50 target price. We expect TAL to enjoy stronger revenue growth than peers given its market lead and aggressive expansion with new learning centres in existing and new cities and Firstleap, its recently acquired all-subject tutoring service in English.

Innovative model to drive penetration and operational efficiency TAL’s innovative two-teacher O2O model should drive penetration in suburban areas of its existing cities and help it enter lower-tier cities where high quality teachers are scarce. The model uses live-streaming of classes from its headquarters to individual learning centres with local support from teaching assistants. Furthermore, this approach may help TAL find long-term operational efficiencies.

2QFY2/17: strong top-line growth, though margins may suffer We forecast strong revenue growth of 44% y-y in 2QFY2/17 to USD250m but with GAAP net profit down 46% y-y to USD34m. Near-term profitability has been hurt by fast capacity growth in the last few quarters and summer promotions being more widely offered this year than last year. Two key metrics to watch for in the coming results are: 1) the enrolment retention ratio of these students for regular courses; and 2) the profitability enhancement of newly acquired businesses.

USD88.50 target price based on DCF (8.1% WACC, 3% term g) We value TAL at USD88.50 using DCF analysis (8.1% WACC, 3% terminal growth rate). We forecast strong revenue growth to continue in FY2/17 with margins improving from FY2/18 as new learning centres start to contribute together with the successful launch of its O2O model.


+852 2825 1188


UP/DOWNSIDE +20.8%

CLOSE USD73.25



EPS 2017 (%) (11.6) NEUTRAL 2

EPS 2018 (%) (11.6) NEGATIVE 1

2016A 2017E 2018E 2019E

Revenue 620 912 1,286 1,668

Rec. net profit 103 88 141 199


EPS growth (%) 36.9 (14.6) 60.7 40.8

Recurring P/E (x) 65.2 76.3 47.5 33.7

Dividend yield (%) 0.0 0.0 0.0 0.0

EV/EBITDA (x) 54.4 40.7 25.6 17.2

Price/book (x) 13.4 11.1 8.8 6.8

Net debt/Equity (%) (57.2) (108.3) (122.2) (131.8)

ROE (%) 27.4 18.2 23.5 25.9


Absolute (%) 6.3 15.0 100.7


Next Results

Mkt cap (USD m) 5,925


Free float (%) 63

Major shareholder Bangxin Zhang (37%)

12m high/low (USD) 73.25/35.80


ADR ticker -



YE Feb (USD m)

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TAL Education Group Rel to S&P 500 INDEX(USD) (%)

36

TAL Education Group XRS US Gabriel R Chan


Investment thesis

TAL is, in our view, in the sweet spot of China’s fast growing education market. It is one of two leaders in K-12 after-school tutoring with a strong reputation for high-quality tutoring services nationwide built over 12 years of constant effort.

TAL is in fast growth phrase driven by aggressive capacity expansion. Its classroom capacity grew about 50% in the last two quarters, and we expect this pace to continue over the rest of FY2/17. We expect profitability to inevitably dip as additional teachers and new learning centres ramp up, and as newly acquired businesses are integrated. However, we expect operating margin expansion starting in FY2/18 once teachers and new learning centres are up to speed and given successful implementation of its two-teacher O2O model.

We rate TAL a BUY with a target price of USD88.50 based on our DCF analysis (8.1% WACC, 3% terminal growth). This equates to 57.4x FY2/18E P/E versus a peer average of 26.8x FY17 estimates (exhibit 4). We believe TAL’s valuation premium is justified given its market lead, higher brand equity, much bigger operational scale, and strong growth potential via its O2O model.

Catalyst

We think the key share price catalyst will be strong demand for TAL’s services from: 1) rising Chinese household income (increased affordability of after-school tutoring), 2) rising competition for limited admissions to reputed schools, 3) population growth after liberalisation to a two-child policy, 4) shortage of high quality education resources, and 5) parents paying more attention to their children’s academic results.

Risk to our call

Downside risks include: 1) unfavourable policy changes, 2) failure to expand its network outside of Beijing and Shanghai, 3) intensifying competition from peers and online education, and 4) a lack of highly qualified teachers.


TAL provides K-12 after-school tutoring in China under the brand ‘Xueersi’ from pre-school to 12th grade with three formats: small classes, personalized premium services and online courses. It was set up in 2003, listed on the NYSE in 2010 and has 300 centres in 19 Chinese cities (31 Aug-15).

2017E 2018E 2019E

ASP (USD) 258 258 258

Number of students enrolled ('000) 3,537 4,984 6,455


Bangxin Zhang 34 2003 Chairman & CEO

Jane Jie Sun 46 2010 Audit Committee Chair &Independent Director

http://en.100tal.com/ Sources: TAL Education Group; BNP Paribas estimates


------- Bull ------- ------- Base ------- ------- Bear -------


Average tuition fee (USD) 284 284 258 258 232 232

Change (%) 10.0 10.0 - - (10.0) (10.0)

Student enrolment (in '000) 3,890 5,482 3,537 4,984 3,183 4,485

Change (%) 10.0 10.0 - - (10.0) (10.0)

Gross profit (USD m) 596 857 451 650 323 470

Gross margin (%) 54.0 55.1 49.4 50.6 43.8 45.1

Source: TAL Education Group Sources: TAL Education Group; BNP Paribas estimates

Event calendar

Date Event

27 Oct 2016 2Q 2017 Results announcement A 10% increase in student enrolments/average tuition fees, all else being equal, is likely to change our FY17E and FY18E gross profits by 32.3/(28.2)% and 31.8/(27.8)% respectively.

A 10% increase in student enrolments/average tuition fees, all else being equal, is likely to change our FY17E and FY18E gross margin by 4.6/(5.6)% and 4.5/(5.5)% respectively.

Small Classes - 89.2%

One-on-One - 6.8%

Online Courses - 4.0%

37



Fast expansion to continue

TAL is, in our view, in the sweet spot of China’s fast growing education market. It is one of two leaders in K-12 after-school tutoring with a strong reputation for high-quality tutoring services nationwide built over 12 years of constant effort.

TAL is in fast growth phrase driven by aggressive capacity expansion. Its classroom capacity grew about 50% in the last two quarters, and we expect this pace to continue over the rest of FY2/17. We expect profitability to inevitably dip as additional teachers and new learning centres ramp up, and as newly acquired businesses are integrated. However, we expect operating margin expansion starting in FY2/18 once teachers and new learning centres are up to speed and given successful implementation of its O2O model.

Penetration to be driven by O2O/two-teacher model

Aside from classroom-based tutoring, TAL has expanded its footprint online to reach a broader target student base and realise greater cross-selling opportunities with existing students. In early 2010, TAL adopted a two-pronged blended-online strategy to establish a lucrative and scalable O2O platform. On one hand, it has started offering various online courses to open up new avenues for revenue growth. On the other hand, it is using internet, multi-media and mobile technologies to complement and enhance offline course offerings, primarily through strategic investments in innovative and high-potential online education-related businesses.

TAL operates www.jzb.com, a leading online platform in China, as a gateway to its online courses. The courses are mainly delivered through www.xueersi.com, which was launched in 2010, and other websites dedicated to specific topics. The current online courses offered appeal to a highly diverse student base, and the plan is to upgrade courses to cater to the needs of students.

TAL is in the process of launching its two-teacher O2O model. This involves live-streaming classes conducted at its headquarters to individual learnings centres across its network, with support provided by local teaching assistants. In our view, this model will help TAL penetrate suburban areas of its existing cities and additional lower tier cities where high-quality teachers are scarce. It may also help improve TAL’s long-term operational efficiency.

2QFY2/17 results preview

We forecast strong revenue growth of 44% y-y in 2QFY2/17 to USD250m but with GAAP net profit down 46% y-y to USD34m. We expect near-term profitability to have been hurt by: a) fast capacity growth in the last few quarters – TAL typically requires new teachers to go through six months of training before conducting classes, and it normally takes about six months for new learning centres to ramp up; and b) summer promotions – they were offered to first-year high-school students this year vs only first-year middle-school students last year.

Two key metrics to watch for in the coming results are: 1) the enrolment retention ratio of these students for regular courses - this will provide an indication of the business outlook for the next two quarters; and 2) the profitability enhancement of newly acquired businesses, particularly Firstleap, which we estimate will account for about 8% of TAL’s 2QFY2/17 revenue.

We resume coverage with a BUY rating

We resume coverage with BUY rating on TAL with a target price of USD88.50 based on DCF analysis (8.1% WACC, 3% terminal growth rate), implying 57.4x FY2/18 P/E.

We expect TAL to show stronger revenue growth than its peers on the back of its market leader and aggressive capacity expansion plan. While profitability may suffer in the near term, we believe the successful implementation of its O2O strategy will drive margin expansion from FY2/18.

38

http://www.jzb.com/

http://www.xueersi.com/



Exhibit 1: Net revenues and operating profits, 2013-2019E Exhibit 2: 12-month forward P/E band

Sources: TAL; BNP Paribas estimates Sources: Bloomberg; BNP Paribas estimates



Total revenues 111 178 226 314 434 620 912 1,286 1,668 2,022 2,325 2,673 3,074 3,536 4,066 Growth (y-y %) 59.6 60.5 27.3 38.9 38.3 42.9 47.1 41.1 29.7 21.2 15.0 15.0 15.0 15.0 15.0

Profits before interest and tax 25 21 31 56 67 82 103 160 226 274 291 334 384 442 508 Taxation (2) (3) (3) (6) (8) (20) (23) (35) (50) (60) (64) (74) (85) (97) (112) Depreciation & amortisation 3 6 7 10 12 19 28 39 51 62 65 69 73 78 82 CAPEX (5) (73) (6) (11) (31) (35) (50) (60) (70) (80) (90) (100) (112) (126) (141) Changes in working capital 21 35 16 22 51 87 113 161 170 158 139 160 184 212 244 Minority interests - - - - 0 0 - - - - Free cash flow 42 (14) 44 72 92 133 172 265 327 353 342 390 445 509 582 11,715

Years 1 2 3 4 5 6 7 8 9 10



Sum of PV 2,197 Terminal value 5,369 Enterprise value 7,566 Net cash/(debt) 531 Equity value (USD m) 8,098 Target price (USD) per ADS 88.47

WACC (%) 8.1 Risk free rate (%) 2.9 Market risk premium (%) 6.1 Equity beta (x) 1.15 Cost of equity (%) 9.9 Cost of debt (%) 5.0 Adjusted effective tax rate (%) 22.0 Terminal growth rate (%) 3.0 Debt / (Debt+Equity) (%) 29.9

Sources: Maple Leaf; BNP Paribas estimates

0

200

400

600

800

1,000

1,200

1,400

1,600

1,80020

13

2014

2015

2016

2017

E

2018

E

2019

E

(USD m) Net revenues Operating profits

0

10

20

30

40

50

60

70

80

Jan-

12

Aug-

12

Mar

-13

Oct

-13

May

-14

Dec

-14

Jul-1

5

Feb-

16

Sep-

16

(USD)

50x

20x

40x

30x

60x

39





CAGR PEG EV/EBITDA ------ P/BV ------ ------- ROE ------- ---- Div. yield ----

2016E 2017E 16E-18E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

(LC) (USD m) (x) (x) (%) (x) (x) (x) (x) (x) (%) (%) (%) (%)





Formal Education Maple Leaf 1317 HK BUY 5.77 992 27.0 22.7 15.2 1.6 17.5 14.6 3.5 3.3 13.3 14.8 2.1 2.4

Virscend Education 1565 HK NR 3.89 1,549 32.3 26.1 41.4 0.6 27.3 21.1 4.1 3.7 17.3 14.8 1.5 2.1


Average 34.4 26.8 1.2 21.1 16.1 7.2 6.7 16.0 17.5 3.5 3.9


40



Financial statements TAL Education Group

Sources: TAL Education Group; BNP Paribas estimates

Profit and Loss (USD m) Year Ending Feb 2015A 2016A 2017E 2018E 2019E

Revenue 434 620 912 1,286 1,668


Gross profit ex depreciation 243 334 477 687 909Other operating income 0 3 0 0 0

Operating costs (164) (235) (347) (490) (635)



Operating EBIT 67 85 103 160 226Net financing costs 11 10 9 21 29


Recurring non operating income (1) 42 0 0 0



Profit after tax 68 103 88 141 199Minority interests 0 0 0 0 0


Other items (1) (1) 0 0 0

Reported net profit 67 103 88 141 199Non recurring items & goodwill (net) 0 0 0 0 0


Per share (USD)

Recurring EPS * 0.82 1.12 0.96 1.54 2.17

Reported EPS 0.85 1.29 1.10 1.76 2.48

DPS 0 0 0 0 0

Growth

Revenue (%) 38.3 42.9 47.1 41.1 29.7


Operating EBIT (%) 17.2 26.5 21.6 55.0 40.7

Recurring EPS (%) 8.0 36.9 (14.6) 60.7 40.8

Reported EPS (%) 9.7 51.5 (14.6) 60.7 40.8





Net margin (%) 15.5 16.6 9.6 11.0 11.9




Inventory days 0.7 0.7 0.6 0.7 0.7

Debtor days 0.0 0.0 0.0 0.0 0.0

Creditor days 6.7 9.7 9.1 8.7 9.7

Operating ROIC (%) 73.9 96.0 107.8 116.2 148.6

ROIC (%) 33.6 27.2 19.0 31.6 40.2

ROE (%) 23.4 27.4 18.2 23.5 25.9


Revenue By Division (USD m) 2015A 2016A 2017E 2018E 2019E

Small Classes 378 553 0 0 0

One-on-One 41 42 0 0 0

Online Courses 16 25 0 0 0

41



Financial statements TAL Education Group

Sources: TAL Education Group; BNP Paribas estimates

Cash Flow (USD m) Year Ending Feb 2015A 2016A 2017E 2018E 2019E



Associates & minorities (0) (0) 0 0 0

Other non-cash items 19 (19) 143 (33) (21)


Capex - maintenance - - - - -


Free cash flow to equity 117 153 320 246 327Net acquisitions & disposals (6) (22) 0 0 0

Dividends paid 0 0 0 0 0

Non recurring cash flows (109) (158) 0 0 0

Net cash flow 2 (28) 321 246 327Equity finance 0 0 5 (1) (1)


Movement in cash 204 (27) 325 245 326

Per share (USD)



Balance Sheet (USD m) Year Ending Feb 2015A 2016A 2017E 2018E 2019E


Working capital liabilities (55) (102) (72) (86) (97)

Net working capital (8) (66) (37) (47) (59)Tangible fixed assets 94 115 138 161 182



Investments 97 274 133 168 192

Other assets 26 54 36 41 44

Invested capital 225 479 371 422 455Cash & equivalents (493) (480) (805) (1,050) (1,376)


Long term debt * 226 228 228 228 228

Net debt (267) (252) (577) (822) (1,148)Deferred tax 0 1 1 1 1


Total equity 313 437 529 669 867



Per share (USD)



Financial strength

Net debt/equity (%) (85.1) (57.2) (108.3) (122.2) (131.8)


Current ratio (x) 9.8 5.1 11.7 12.6 14.6



Valuation 2015A 2016A 2017E 2018E 2019E

Recurring P/E (x) * 89.2 65.2 76.3 47.5 33.7


Reported P/E (x) 86.4 57.0 66.8 41.6 29.5

Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

P/CF (x) 59.4 57.8 22.8 40.6 25.9

P/FCF (x) 49.6 38.4 18.3 23.8 18.0

Price/book (x) 18.5 13.4 11.1 8.8 6.8


EV/EBITDA (x) 70.1 54.4 40.7 25.6 17.2



42

Tarena Int’l TEDU US BNP PARIBAS Hong Kong R esearch Team

24 OCTOBER 2016 CHINA / CONSUMER SERVICES

TARENA INT'L TEDU US

Scalability driving profitability

KEY STOCK DATA


Resume coverage at BUY: the most scalable business model TEDU is China’s leading professional education provider with a strong O2O strategy (live-streaming classes from its headquarters to centres across China) and a business model we find more scalable than its listed peers’. This should reflect in superior profit margins, with robust near- to medium-term growth, and long-term growth if its entry into new segments succeeds. We resume coverage at BUY.

Diversification could unlock long-term growth

TEDU entered the primary to high school segments with three courses launched end-Dec/early-2016 (Tongcheng and Tongmei in Dec 2015 and Tongchuang in 2Q16). These courses will be a key focus in 2016-17. They expand its target demographic and should lift utilization rates as classes are held outside TEDU’s current core training hours. This could help drive revenue and margin growth.

3Q16: record high earnings expected 3Q is TEDU’s peak season, and we forecast 3Q17 revenue and US GAAP net profit of USD73m and USD18m, respectively, on the back of record high student enrolment last quarter and continued margin improvement through better classroom utilization and stable student acquisition costs. We think the key metrics will be the pace of margin growth and student enrolment, particularly in new course offerings.

USD18.30 DCF-based target price (12.1% WACC, 3% term g) We value TEDU at USD18.30 using DCF analysis (12.1% WACC, 3% terminal growth rate). In our view, its scalable O2O model and strong after-sales service in terms of graduate job placement will help it sustain robust near- to -medium term growth. TEDU has already made some progress diversifying into new segments, and this could provide a long-term growth opportunity.


+852 2825 1188


UP/DOWNSIDE +21.6%

CLOSE USD15.05



EPS 2017 (%) (4.0) NEUTRAL 0

EPS 2018 (%) (5.7) NEGATIVE 0

2015A 2016E 2017E 2018E

Revenue 189,190 239,320 295,636 357,624

Rec. net profit 28,709 37,851 47,955 58,143


EPS growth (%) (3.2) 32.5 26.7 21.2

Recurring P/E (x) 30.8 23.2 18.3 15.1

Dividend yield (%) 1.1 1.4 1.7 2.1

EV/EBITDA (x) 18.7 13.0 9.5 7.1

Price/book (x) 3.9 3.4 2.8 2.4

Net debt/Equity (%) (83.2) (84.7) (87.1) (88.8)

ROE (%) 14.8 16.8 17.9 18.1


Absolute (%) 3.7 40.3 54.0


Next Results

Mkt cap (USD m) 839


Free float (%) 74

Major shareholder Shao Yunhan (26%)

12m high/low (USD) 15.43/8.40


ADR ticker -



YE Dec (USD K)

November 2016

(10)

10

30

50

70

8

10

12

14


Tarena Int'l Rel to MSCI China(USD) (%)

43

Tarena Int'l TEDU US Gabriel R Chan


Investment thesis TEDU’s highly competitive training and course offerings are reflected in its students’ high employment rates (>90%). Its well-received O2O model targets mature, self-motivated high-school and college graduates with long attention span. We think this is a good target market, making this the most scalable and replicable business model among listed peers’. With China’s increasingly competitive job market, we expect TEDU’s to see continued robust student enrolment growth.

We rate TEDU a BUY with a USD18.30 target price based on DCF analysis (12.1% WACC, 3% terminal growth rate). In our view, its scalable O2O model and strong after-sales service in terms of graduate job placement will help sustain robust growth in the near- to medium-term, with long-term potential if it successfully diversifies its product offering. Its diversification efforts have already made some progress, with consistent student enrolment growth in new courses, particularly in non-IT courses and IT courses for children.

Catalyst Key catalysts include: 1) growing demand for talents with IT, internet and mobile application skillset and knowledge; 2) successful launches of non-IT related courses; 3) faster than expected learning centre expansion; 4) lower than expected student acquisition costs.

Risk to our call Key risks to our call include: 1) lower than expected tuition increase; 2) increasing reliance on tuition instalment payment program to drive growth; 3) increase in bad debt.


Tarena was built in 2002 and has since become the leading IT professional education services provider in China. The Company provides 9 IT courses and 3 non-IT courses under a hybrid instruction model combining both online and offline channels.

2016E 2017E 2018E

ASP (USD) 2,255 2,290 2,353

Number of students enrolled (nos.) 106,119 129,098 152,004


Shaoyun Han 44 2002 Founder, chairman and CEO Jianguang Li 50 2004 Director Suhai Ji 38 2013 CFO

http://www.tarena.com.cn/ Sources: Tarena Int'l; BNP Paribas estimates


-------- Bull -------- ------- Base ------- ------- Bear -------


Average tuition fee (USD) 2,481 2,519 2,255 2,290 2,030 2,061

Change (%) 10.0 10.0 - - (10.0) (10.0)

Student enrolment 116,731 142,007 106,119 129,098 95,507 116,188

Change (%) 10.0 10.0 - - (10.0) (10.0)

Gross profit (USD m) 215 265 174 215 133 164

Gross margin (%) 75.1 75.2 72.8 72.6 70.3 70.2

Source: Tarena Int’l Sources: Tarena Int'l; BNP Paribas estimates

Event calendar

Date Event

15 Nov 2016 3Q16 Results announcement

A 10% increase in student enrolments/average tuition fees, all else being equal, changes our FY16E and FY17E gross profits by +23.2%/-23.9% and +23.6%/-23.7%.

A 10% increase in student enrolments/average tuition fees, all else being equal, changes our FY16E and FY17E gross margin by +2.3%/-2.5% and +2.6%/-2.4%.

Tuition fee - 99.7%

Certification service fee - 2.3%

Others - 0.1%

Business taxes and surcharges - -2.1%

44



Scalability driving profitability

TEDU is a leading professional education services provider in China aiming to help college graduates secure job placements. TEDU’s post-course job placement rate for its students within four months of completing a course is over 90%; this is high relative to rates at its peers. Given China’s increasingly competitive job market, we believe TEDU is well positioned to grow.

Most scalable business model among listed peers

TEDU has developed a well-received O2O model, consisting of three components: live distance instruction, classroom-based tutoring and online learning modules. It has instructors giving lectures in classrooms at its headquarters in Beijing which are simultaneously broadcast to learning centres across the country. In each classroom, the company has one or two teaching assistants standing by to answer students’ questions. Courses are further supplemented by its self-developed Tarena Teaching System (TTS) platform, ensuring students receive consistent high quality education services.

In our view, TEDU’s O2O model is most suitable for mature students that are self-motivated with strong learning discipline. TEDU’s students are mostly high-school and college graduates that are relatively actively seeking employment compared to the K-12 students who are much younger and normally lack self-discipline and motivation.

In March 2015, TEDU launched its online learning platform, TMOOC.CN, with a content library of 16,000 hours of video content in nearly 400 classes. The number of registered users was 185,000 as of 2Q16. We believe this platform complements its existing hybrid model and will be another useful enrolment channel.

Diversifying course offerings

TEDU has already expanded its offerings to non-IT courses, including digital art, online sales and marketing and accounting (all initiated in 2014). Since launch in 2013, its digital art course has grown surprisingly well and was its largest course in terms of enrolment in 1Q15. Its accounting course, though only launched at the end of 2014, was its third biggest course after digital art and Java (in terms of enrolments).

TEDU launched two new courses in Nov 2015 (Tongcheng in computer programming and Tongmei in digital arts for primary to high school students) and another in 2Q16 (Tongchuang in robot programing and 3D printing for students aged 8-18). These courses have a different teaching method to TEDU’s core courses. Classes are conducted through pre-recorded videos with teaching assistants on site to help students and make classes more interactive. They have smaller classes (less than 15 students per class compared to much higher number of students in its other

Exhibit 1: Student enrolment ratio into all new course offerings, 1Q15-2Q16

Sources: Tarena; BNP Paribas

0

2

4

6

8

10

12

14

16

18

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

(%)

45



professional training courses) and are two to three hours long conducted once a week and only late evening on weekdays or on weekends, which should help lift utilization rates at learning centres. Trial courses started in December 2015 and only in Beijing. TEDU charges RMB15,000 per course, slightly below the RMB16,800-17,800 for its core course. As of end-2Q16, about 1,000 students were enrolled on these courses and management expects this figure to rise to around 3,000 by end-FY16. We believe this initiative expands both its course offerings and its target demographic, and could develop into a meaningful revenue stream.

3Q16 results preview

We project 3Q17 revenue and GAAP net profit of USD73m (+22% y-y) and USD18m (+33% y-y), respectively, on the back of record high student enrolment last quarter, as well as continuing margin improvement through improved classroom utilization and stable student acquisition costs.

3Q is TEDU’s strongest quarter, and we expect record high revenue and net profit in 3Q16. We think key metrics in the results will be the pace of margin improvement, particularly by way of control of student acquisition costs and R&D expenses, as well as student enrolment, especially in new course offerings. These metrics are good indicators of TEDU’s longer-term business outlook in terms of scope for further margin improvement and progress of diversification of course offerings.

Exhibit 2: New course offerings

Source: Tarena

Exhibit 3: Quarterly student enrolments, 1Q13-2Q16 Exhibit 4: Quarterly course enrolments, 1Q13-2Q16

Sources: Tarena; BNP Paribas Sources: Tarena; BNP Paribas

0

5,000

10,000

15,000

20,000

25,000

30,000

1Q13

2Q13

3Q13

4Q13

1Q14

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3Q14

4Q14

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2Q15

3Q15

4Q15

1Q16

2Q16

(nos.)

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2Q16

(nos.)

46



Resuming coverage at BUY

We resume coverage with BUY rating on TEDU with a target price of USD17.30 based on our DCF analysis (12.1% WACC, 3% terminal growth rate). Our target price equates to 22.3x FY17 P/E. We expect TEDU’s scalable O2O model and strong after-sales service in terms of graduate job placement to help sustain robust near- to medium-term growth. We see long-term potential if it succeeds in diversifying into new segments. Diversification efforts have already had some success, with student enrolment growth in new courses.

Exhibit 5: Average acquisition cost per student enrolment, 1Q13-2Q16

Sources: Tarena; BNP Paribas

Exhibit 6: Operating profits and margins, 2013-2018E Exhibit 7: 12-month forward PE band

Sources: Tarena; BNP Paribas estimates Sources: Bloomberg; BNP Paribas estimates

0

50

100

150

200

250

300

350

400

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

(USD)

12.5

13.0

13.5

14.0

14.5

15.0

15.5

0

10

20

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2013 2014 2015 2016E 2017E 2018E

(%)(USD m) Operating profits (LHS)Operating margin (RHS)

5.0

7.0

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13.0

15.0

17.0

Apr-14 Nov-14 Jun-15 Jan-16 Aug-16

(USD)

24x

15x

21x

18x

27x

47





Net revenues 26 57 93 136 189 239 296 358 433 525 604 694 798 918 1,056 Growth (y-y %) 120.7 63.4 46.7 38.9 26.5 23.5 21.0 21.1 21.2 15.0 15.0 15.0 15.0 15.0

Profits before interest and tax 0 10 13 19 25 36 44 52 62 75 84 97 112 128 147 Taxation (0) (2) (2) (2) (1) (3) (4) (5) (6) (8) (8) (10) (11) (13) (15) Depreciation & amortisation 1 2 5 7 9 12 16 22 28 36 37 39 41 43 45 CAPEX (3) (7) (9) (8) (16) (16) (19) (23) (28) (34) (36) (38) (39) (41) (44) Changes in working capital (3) (5) 11 (14) 2 1 2 0 3 2 3 3 4 5 5 Minority interests - - - - - - - - - - - - - - - Free cash flow (4) (1) 18 3 20 30 40 45 59 71 80 92 106 122 140 1,591

Years 1 2 3 4 5 6 7 8 9 10

PV of free cash flow 35 36 42 45 46 47 48 49 50 510


Sum of PV 398 Terminal value 510 Enterprise value 908 Net cash/(debt) 162 Equity value (USD m) 1,069 Equity value (USD m) 1,069 Fair value (USD) 18.30


Sources: Tarena; BNP Paribas estimates

48





CAGR PEG -- EV/EBITDA -- ------ P/BV ------ ------- ROE ------- ---- Div. yield ----

2016E 2017E ‘16E-18E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E

(LC) (USD m) (x) (x) (%) (x) (x) (x) (x) (x) (%) (%) (%) (%)






Maple Leaf 1317 HK BUY 5.77 992 27.0 22.7 15.2 1.6 18.5 17.5 14.6 3.5 3.3 13.3 14.8 2.1


Average 34.4 26.6 1.2 21.2 16.5 8.8 6.7 14.3 17.2 7.8 3.8


49



Financial statements Tarena Int'l

Sources: Tarena Int'l; BNP Paribas estimates

Profit and Loss (USD K) Year Ending Dec 2014A 2015A 2016E 2017E 2018E

Revenue 136,204 189,190 239,320 295,636 357,624

Cost of sales ex depreciation (32,002) (44,740) (52,785) (64,419) (75,424)

Gross profit ex depreciation 104,202 144,450 186,535 231,217 282,200Other operating income 0 0 0 0 0

Operating costs (77,956) (110,296) (138,338) (170,670) (208,603)

Operating EBITDA 26,247 34,154 48,197 60,548 73,597Depreciation (7,078) (8,830) (12,227) (16,467) (21,646)


Operating EBIT 19,168 25,324 35,970 44,080 51,952Net financing costs 7,928 4,022 5,624 8,618 12,652




Profit before tax 27,096 29,346 41,594 52,698 64,603Tax (2,405) (637) (3,743) (4,743) (6,460)

Profit after tax 24,691 28,709 37,851 47,955 58,143Minority interests 0 0 0 0 0


Other items (576) 0 0 0 0

Reported net profit 24,115 28,709 37,851 47,955 58,143Non recurring items & goodwill (net) 0 0 0 0 0

Recurring net profit 24,115 28,709 37,851 47,955 58,143

Per share (USD)

Recurring EPS * 0.50 0.49 0.65 0.82 0.99

Reported EPS 0.58 0.53 0.69 0.87 1.05

DPS 0 0.16 0.21 0.26 0.32

Growth

Revenue (%) 46.7 38.9 26.5 23.5 21.0


Operating EBIT (%) 42.2 32.1 42.0 22.5 17.9

Recurring EPS (%) n/m (3.2) 32.5 26.7 21.2

Reported EPS (%) n/m (8.7) 28.4 26.7 21.2





Net margin (%) 17.7 15.2 15.8 16.2 16.3




Inventory days 0.0 0.0 0.0 0.0 0.0

Debtor days 51.2 44.2 39.3 39.8 40.2

Creditor days 3.1 4.1 4.8 4.5 4.7

Operating ROIC (%) 64.5 80.1 92.4 90.8 88.1

ROIC (%) 38.0 42.8 49.5 53.6 55.8

ROE (%) 20.9 14.8 16.8 17.9 18.1


Revenue By Division (USD K) 2014A 2015A 2016E 2017E 2018E

Tuition fee 135,932 188,642 233,576 288,541 349,041

Certification service fee 2,937 4,411 5,504 6,800 8,225

Others 467 182 239 296 358

Business taxes and surcharges (3,132) (4,046) (4,046) (4,046) (4,046)

50



Financial statements Tarena Int'l

Sources: Tarena Int'l; BNP Paribas estimates

Cash Flow (USD K) Year Ending Dec 2014A 2015A 2016E 2017E 2018E

Recurring net profit 24,115 28,709 37,851 47,955 58,143

Depreciation 7,078 8,830 12,227 16,467 21,646

Associates & minorities 0 0 0 0 0

Other non-cash items 10,547 16,768 0 0 0

Recurring cash flow 41,740 54,307 50,078 64,423 79,789Change in working capital (13,280) 1,536 697 2,248 173

Capex - maintenance 0 0 0 0 0

Capex - new investment (7,879) (16,054) (15,556) (19,216) (23,246)

Free cash flow to equity 20,581 39,789 35,219 47,455 56,716Net acquisitions & disposals 0 0 0 0 0

Dividends paid 0 0 0 0 0

Non recurring cash flows (111,580) 424 0 0 0

Net cash flow (90,999) 40,213 35,219 47,455 56,716Equity finance 110,004 3,606 0 0 0


Movement in cash 15,473 36,080 35,219 47,455 56,716

Per share (USD)



Balance Sheet (USD K) Year Ending Dec 2014A 2015A 2016E 2017E 2018E

Working capital assets 31,914 32,817 40,526 50,063 61,830

Working capital liabilities (14,153) (21,778) (23,393) (27,618) (31,237)

Net working capital 17,762 11,039 17,133 22,445 30,593Tangible fixed assets 13,374 19,691 23,020 25,769 27,368

Operating invested capital 31,136 30,730 40,153 48,213 57,962Goodwill 0 0 0 0 0


Investments 17,313 17,591 17,591 17,591 17,591

Other assets 5,858 13,072 13,072 13,072 13,072

Invested capital 54,307 61,392 70,815 78,876 88,624Cash & equivalents (149,495) (171,525) (206,745) (254,199) (310,916)



Net debt (149,495) (171,525) (206,745) (254,199) (310,916)Deferred tax 0 0 0 0 0

Other liabilities 1,638 1,437 1,437 1,437 1,437

Total equity 182,887 206,144 243,994 291,950 350,093


Invested capital 54,307 61,392 70,815 78,876 88,624

Per share (USD)



Financial strength

Net debt/equity (%) (81.7) (83.2) (84.7) (87.1) (88.8)


Current ratio (x) 12.8 9.4 10.6 11.0 11.9



Valuation 2014A 2015A 2016E 2017E 2018E

Recurring P/E (x) * 29.8 30.8 23.2 18.3 15.1


Reported P/E (x) 25.7 28.2 22.0 17.3 14.3

Dividend yield (%) 0.0 1.1 1.4 1.7 2.1

P/CF (x) 14.9 14.9 16.6 12.9 10.4

P/FCF (x) 30.1 20.3 23.6 17.5 14.7

Price/book (x) 3.4 3.9 3.4 2.8 2.4


EV/EBITDA (x) 17.9 18.7 13.0 9.5 7.1



51



Disclaimers and Disclosures

APPENDIX

DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (ASIA) LTD

ANALYST(S) CERTIFICATION

Gabriel R Chan, BNP Paribas Securities (Asia) Ltd, +852 2825 1188, [email protected] The BNP Paribas Securities (Asia) Ltd Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations

The individual(s) identified above certify(ies) that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein.

IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS "BNP Paribas” is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule 2711. The following disclosures relate to relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other entities within the BNP Paribas Group (collectively, "BNP Paribas"). The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report:

BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees. 2. It had an investment banking relationship with this company in the last 12 months. 3. It received compensation for investment banking services from this company in the last 12 months. 4. It expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months. 5. It beneficially owns 1% or more of any class of common equity securities of the subject company. 6. It makes a market in securities in respect of this company. 7. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in

securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted. 8. The analyst (or a member of his/her household) is an officer, director, employee or advisory board member of this company or has received

compensation from the company.

IMPORTANT DISCLOSURES REQUIRED IN KOREA The disclosure column in the following table lists the important disclosures applicable to each Korea listed company that has been rated and/or recommended in this report:

1. The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd (“BNPPSK”) by means of payment guarantees, endorsements, and provision of collaterals and/or taking over the obligations.

2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company. 3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act. 4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the

transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares. 5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year. 6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act,

BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision shall apply only where tender offer has not expired.

7. The listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering into arrangement for public offering or underwriting-related agreement for issuance of stocks

8. The Company that has signed a nominated advisor contract with BNPPSK as defined in Item 2 of Article 8 of the KONEX Market Listing Regulation. 9. The Company is recognized as having considerable interests with BNPPSK in relation to No.1 to No. 8. 10. The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the

following securities or rights (hereinafter referred to as “Securities, etc.” in this Article) regardless of whose name is used in the trading. 1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited. 2) Stock options of the Company whose securities dealings are being solicited. 3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying.

Company Ticker Disclosure (as applicable)

China Maple Leaf Educational 1317 HK 1, 2, 3

Company Ticker Price (as of 21-Oct-2016 closing price) InterestN/A N/A N/A N/A

52



History of change in investment rating and/or target price

New Oriental Edu (EDU US)

Gabriel R Chan started covering this stock from 24 October 2016 Price and TP are in local currency Sources: FactSet; BNP Paribas

TAL Education Group (XRS US)


12

18

24

30

36

42

48

54Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

New Oriental Edu Target Price(USD)

Date Rating Target price Date Rating Target price Date Rating Target price21-Oct-13 Hold 23.75 23-Apr-15 Buy 30.80 12-May-16 Suspended N/A20-Jan-14 Buy 44.50 15-Oct-15 Buy 27.8726-Feb-15 Buy 25.90 15-Jan-16 Buy 38.00

10

20

30

40

50

60

70

80Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

TAL Education Group Target Price(USD)

Date Rating Target price Date Rating Target price15-Jan-16 Buy 48.00 12-May-16 Suspended N/A

53



China Maple Leaf Educational (1317 HK)


Tarena Int'l (TEDU US)


Company Ticker Price Rating Valuation & Risks

China Maple Leaf Educational

1317 HK HKD 5.77 Buy DCF-based TP. Downside risks: Rising competition may lead to market share loss and affect ML’s ability to increase tuition fee levels. Failure to renew existing China/BC certifications and to obtain other necessary approvals, licences and permits from the government pose downside risks to our call.

New Oriental Edu EDU US USD 46.80 Buy DCF-based TP. Downside risks: EDU may face 1) intensifying competition from peers, 2) weakened ability to increase tuition fees and student enrolment, and 3) RMB depreciation (given USD denominated financial statements).

TAL Education Group XRS US USD 73.25 Buy DCF-based TP. Downside risks include: 1) unfavourable policy changes, 2) failure to expand its network outside of Beijing and Shanghai, 3) intensifying competition from peers and online education, and 4) a lack of highly qualified teachers.

Tarena Int'l TEDU US USD 15.05 Buy DCF-based TP. Key downside risks to our call include: 1) lower than expected tuition increase; 2) increasing reliance on tuition instalment payment program to driver growth; 3) increase in bad debt.

Sources: Factset, BNP Paribas

0

2

4

6

8

10Nov-14 May-15 Nov-15 May-16

China Maple Leaf Educational Target Price(HKD)

Date Rating Target price Date Rating Target price Date Rating Target price16-Jan-15 Buy 2.91 15-Jan-16 Buy 4.45 12-May-16 Suspended N/A22-May-15 Buy 3.50 05-Apr-16 Buy 5.8530-Nov-15 Buy 3.80 28-Apr-16 Buy 6.40

6

8

10

12

14

16

18Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

Tarena Int'l Target Price(USD)

Date Rating Target price Date Rating Target price11-Jun-15 Buy 15.35 15-Jan-16 Buy 13.0019-Aug-15 Buy 14.40 12-May-16 Suspended N/A

54



GENERAL DISCLAIMER

This report was produced by BNP Paribas Securities (Asia) Ltd, member company(ies) of the BNP Paribas Group.

This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set forth herein. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Customers are advised to use the information contained herein as just one of many inputs and considerations prior to engaging in any trading activity. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. This report is not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verification, or taken in substitution for the exercise of judgment by the recipient. Additionally, the products mentioned in this report may not be available for sale in certain jurisdictions. As an investment bank with a wide range of activities, BNP Paribas may face conflicts of interest, which are resolved under applicable legal provisions and internal guidelines. You should be aware, however, that BNP Paribas may engage in transactions in a manner inconsistent with the views expressed in this document, either for its own account or for the account of its clients. Australia: This report is being distributed in Australia by BNP Paribas Sydney Branch, registered in Australia as ABN 23 000 000 117 at 60 Castlereagh Street Sydney NSW 2000. BNP Paribas Sydney Branch is licensed under the Banking Act 1959 and the holder of Australian Financial Services Licence no. 238043 and therefore subject to regulation by the Australian Securities & Investments Commission in relation to delivery of financial services. By accepting this document you agree to be bound by the foregoing limitations, and acknowledge that information and opinions in this document relate to financial products or financial services which are delivered solely to wholesale clients (in terms of the Corporations Act 2001, sections 761G and 761GA; Corporations Regulations 2001, division 2, reg. 7.1.18 & 7.1.19) and/or professional investors (as defined in section 9 of the Corporations Act 2001). Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities, dealing in futures contracts and advising on corporate finance. For professional investors in Hong Kong, please contact BNP Paribas Securities (Asia) Limited (address: 63/F Two International Finance Centre, 8 Finance Street, Central, Hong Kong; tel:2909 8888; fax: 2845 2232) for all matters and queries relating to this report. India: In India, this document is being distributed by BNP Paribas Securities India Pvt. Ltd. ("BNPPSIPL"), having its registered office at 5th floor, BNP Paribas House, 1 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai 400 051, INDIA (Tel. no. +91 22 3370 4000 / 6196 4000, Fax no. +91 22 6196 4363). BNPPSIPL is registered with the Securities and Exchange Board of India (“SEBI”) as a research analyst (Regn. No. INH000000792) and as a stockbroker in the Equities and the Futures & Options segments of National Stock Exchange of India Ltd. (“NSE”) and BSE Ltd. and in the Currency Derivatives segment of NSE (SEBI Regn. Nos.: INB/INF/NSF/NSE231474835, INB/INF011474831; CIN: U74920MH2008FTC182807; Website: www.bnpparibas.co.in). No material disciplinary action has been taken against BNPPSIPL by any regulatory or government authority. BNPPSIPL or its associates may have received compensation or other benefits for brokerage services or for other products or services, from the company(ies) that have been rated and/or recommended in the report and / or from third parties. Indonesia: This report is being distributed by PT BNP Paribas Securities Indonesia and is delivered by its licensed employee(s), including marketing/sales person, to its client. PT BNP Paribas Securities Indonesia, having its registered office at Menara BCA, 35th floor, Grand Indonesia, JL. M.H. Thamrin No.1, Jakarta 10310, Indonesia, is a subsidiary company of BNP Paribas SA and licensed under Capital Market Law no. 8 year 1995, a holder of broker-dealer and underwriter licenses issued by the Capital Market and Financial Institution Supervisory Agency (now Otoritas Jasa Keuangan/OJK). PT BNP Paribas Securities Indonesia is also a member of Indonesia Stock Exchange and supervised by Otoritas Jasa Keuangan (OJK). Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens except in compliance with applicable Indonesian capital market laws and regulations. This report is not an offer of securities in Indonesia and may not be distributed within the territory of the Republic of Indonesia or to Indonesian citizens in circumstance which constitutes an offering within the meaning of Indonesian capital market laws and regulations. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association, the Financial Futures Association of Japan and the Type II Financial Instruments Firms Association. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Malaysia: This report is issued and distributed by BNP Paribas Capital (Malaysia) Sdn Bhd. The views and opinions in this research report are our own as of the date hereof and are subject to change. BNP Paribas Capital (Malaysia) Sdn Bhd has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of BNP Paribas Capital (Malaysia) Sdn Bhd. This publication is being provided to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of BNP Paribas Capital (Malaysia) Sdn Bhd. 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In relation to the distribution to such categories of investors, BNPPSSL and its representatives are exempted under Regulation 35 of the FAR from the requirements in Section 36 of the Financial Advisers Act of Singapore, regarding the disclosure of certain interests in, or certain interests in the acquisition or disposal of, securities referred to in this report. For Institutional and Accredited Investors in Singapore, please contact BNP Paribas Securities (Singapore) Ptd Ltd (company registration number: 199801966C; address: 10 Collyer Quay, 34/F Ocean Financial Centre, Singapore 049315; tel: (65) 6210 1288; fax: (65) 6210 1980) for all matters and queries relating to this report. South Africa: In South Africa, BNP Paribas Securities South Africa (Pty) Ltd is a licensed member of the Johannesburg Stock Exchange and an authorised Financial Services Providers and subject to regulation by the Financial Services Board. BNP Paribas Securities South Africa (Pty) Ltd does not expressly or by implication represent, recommend or propose that the financial products referred to in this report are appropriate to the particular investment objectives, financial situation or particular needs of the recipient. This document does not constitute advice as contemplated in the Financial Advisory and Intermediary Services Act, 2002. South Korea: BNP Paribas Securities Korea is registered as a Licensed Financial Investment Business Entity under the FINANCIAL INVESTMENT SERVICES AND

55



CAPITAL MARKETS ACT and regulated by the Financial Supervisory Service and Financial Services Commission. This document does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. Switzerland: This report is intended solely for customers who are “Qualified Investors” as defined in article 10 paragraphs 3 and 4 of the Swiss Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Swiss Federal Ordinance on Collective Investment Schemes of 22 November 2006 (CISO). “Qualified Investors” includes, among others, regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes, regulated insurance companies as well as pension funds and companies with professional treasury operations. This document may not be suitable for customers who are not Qualified Investors and should only be used and passed on to Qualified Investors. For specification purposes, a “Swiss Corporate Customer” is a Client which is a corporate entity, incorporated and existing under the laws of Switzerland and which qualifies as “Qualified Investor” as defined above." BNP Paribas (Suisse) SA is authorised as bank and as securities dealer by the Swiss Federal Market Supervisory Authority FINMA. BNP Paribas (Suisse) SA is registered at the Geneva commercial register under No. CH-270-3000542-1. BNP Paribas (Suisse) SA is incorporated in Switzerland with limited liability. Registered Office: 2 place de Hollande, CH-1204 Geneva. Taiwan: This report is being distributed to Taiwan based clients by BNP Paribas Securities (Taiwan) Co., Ltd or by a subsidiary or affiliate of BNP Paribas. Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decision. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. BNP Paribas Securities (Taiwan) Co., Ltd. may not execute transactions for clients in these securities. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of BNP Paribas.

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Additional Disclosures Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this note or your BNP Paribas representative. All share prices are as at market close on 21 October 2016 unless otherwise stated.

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RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Industry Recommendations Improving (): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Stable (previously known as Neutral) (): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 24 October 2016)

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report. © 2016 BNP Paribas Group

Total BNP Paribas coverage universe 457 Investment Banking Relationship (%)

Buy 266 (58.2%) Buy 31.58

Hold 132 (28.9%) Hold 35.61

Reduce 59 (12.9%) Reduce 25.42

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Documents

SRF 102941 34 - BNP Paribas...Note: Priced at close of business 21/10/2016. Share prices and TPs are in listing currency. Sources: FactSet, BNP Paribas estimates Our research is available