20140428-高盛-Feeding_talent_to_China_s_technology_sector__initiate_with_Buy_34页_562kb

Summary of Tarena International, Inc. Investment Report

Core Content

Tarena International, Inc. is identified as a leading provider of professional IT education services in China. The company's business model is based on a hybrid approach that combines online learning scalability with the effectiveness of classroom-based tutoring. This model allows Tarena to maintain a student-to-teacher ratio of about 700:1 in 2013, with Java courses achieving a ratio of 3,276:1. This efficient model enables the company to retain and attract highly qualified instructors, supported by premium salaries and strong governance over education resources.

Main Points

• Market Opportunity: China's professional education market was valued at over $11bn in 2013, with IDC forecasting it to exceed $15bn by 2017. Tarena's market share in IT education was 8.3% in 2013.
• Growth Potential: Tarena is projected to achieve a 31% CAGR in revenue from 2015 to 2018, driven by 27% enrollment and 4% pricing growth. Operating margins are expected to increase from 15% in 2013 to 23% by 2015, and non-GAAP net profit to grow at 37% CAGR.
• Valuation: The 12-month target price is set at $20 per ADS, implying a $1,202mn market cap. This is based on a 0.7X PEG multiple against a 37% earnings CAGR, suggesting 124% upside potential.
• Value-Add: Tarena provides not only IT knowledge but also hands-on skills and job placement services. Its certificates are recognized by industry leaders such as Oracle, enhancing students' employability.
• Employer and University Partnerships: Tarena partners with over 300 universities and colleges and has a network of 35,000 corporate employers. It organizes 800 recruiting events monthly and offers customized training programs for some employers.
• Pricing Power: Tarena's tuition fees are higher than the market average, with a standard rate of around Rmb15,800 for a four-month full-time program. The company also offers financing options, with 57% of students receiving some form of financial assistance in 2013.

Key Information

• Tuition and Affordability: Standard tuition in 2013 was between Rmb13,800 and Rmb16,800 per course, with discounts for university partners. Tarena has also partnered with state-owned banks to provide student loans.
• Financials:
  • Revenue was $92.8mn in 2013, projected to grow to $269.9mn by 2016.
  • Net income is expected to increase from $14.8mn in 2013 to $68.4mn by 2016.
  • EBITDA margin is forecasted to improve from 20.4% in 2013 to 31.5% by 2016.
• Risk Factors:
  • Technology evolution
  • Online disruption
  • Sustainability of pricing
• Investment Recommendation: Initiate coverage at Buy.
• Key Risks:
  • Technology evolution
  • Online disruption
  • Sustainability of pricing

Investment Overview

• Tarena has trained over 130,000 students and placed them with approximately 35,000 corporate employers.
• The company has a strong job placement record, with a six-month post-course placement rate exceeding 90%.
• Tarena's hybrid learning model ensures scalability, consistent teaching quality, and a professional learning environment.
• The company is diversifying its offerings beyond IT, including courses in accounting and finance.

Valuation Metrics

Financial Highlights

• Revenue Growth: 63.4% in 2013, expected to decline to 35.5% by 2016.
• EBITDA Growth: 45.4% in 2013, projected to reach 49.6% by 2016.
• Net Income Growth: Expected to increase significantly, with a 177.4% growth in 2014.
• Operating Margin: Projected to rise from 15% in 2013 to 23% by 2015.
• Free Cash Flow Yield: Expected to increase from 5.6% in 2014 to 13.8% in 2016.

Conclusion

Tarena International, Inc. presents a compelling opportunity in the Chinese professional IT education market, leveraging a hybrid learning model to scale efficiently and maintain quality. With strong growth forecasts, a solid value proposition for students and employers, and a strategic expansion into new course offerings, the company is positioned for sustainable success. However, the investment carries risks related to technological changes, online competition, and the ability to maintain pricing power. The report recommends initiating coverage at Buy.