ab12 January 2024Global Research and Evidence LabPowered byUBS Evidence LabYESChina Education SectorAPAC Focus: If you think "education" is expensive, try ignorance - ReduxWe estimate K12 afterschool tutoring still has a Rmb300bn TAM, despite the severe 'Double Reduction' restrictions imposed on it in 2021. We expect this large TAM, along with benign competition and improving learning centre economics, to drive a 30%+ EPS CAGR for major players, like EDU and TAL, in 2024-26E. After rallying 83% in 12 months, investors are concerned EDU is now a 'crowded trade', but our analysis shows long-only funds are still 42bps underweight the stock. We expect the education sector, EDU in particular, to benefit from incremental inflows from such funds. We reiterate our Buy ratings on EDU/TAL, with EDU being our top pick. Reborn from the ashes stronger in the aftermath of Double Reduction Since we initiated coverage on Chinese education stocks under the same title as this report in 2017, the sector has been on a rollercoaster ride. After the Double Reduction regulation led to a precipitous sell-off in the sector in 2021, EDU and TAL have delivered a remarkable recovery, forging new markets in non-academic after-school tutoring (AST). Amid concerns the sector is now a 'crowded traded' and future growth priced in, we carry out a deep dive into sector fundamentals and investor positioning, leveraging data from UBS Evidence Lab and UBS Quant Research, as well as evidence gathered from our meetings with 141 buy-side institutions in 2023.TAM is smaller, but unit economics have improved We estimate there is still a substantial Rmb302bn TAM for K12 AST, albeit only a third of our pre-Double Reduction estimate of Rmb1,025bn due to a smaller addressable population, partly offset by higher ASPs. We expect the steady-state learning centre level OPM to improve 6ppts to 22% in 2024E vs 2021 due to: 1) operating leverage from a higher ASP; 2) lower unit rental costs; and 3) less competition. In OP terms, we estimate TAM at Rmb67bn vs EDU/TAL's FY24E adjusted OP of Rmb4.2bn/-49m.Our marketing feedback and quant data: EDU not as well-owned as it appearsOur meetings with investors in 2023 suggest hedge funds were generally early to enter the education sector, while long-only interest picked up from mid-year. Long-only funds' positioning in the sector still appears to lag their growing interest. UBS Quant Research data suggests EDU's weight in long-only funds is still at the low end of that for major internet and education stocks. Thus, we expect incremental inflows from long-only funds into the sector, particularly EDU. We maintain our Buy ratings on EDU and TAL.Price target Price targetPriceMkt capEV30-d ADVEPS CAGRPEGEBITDA CAGRNewOld(LC)(USD m)(USD m)(USD m)2024E2025E2026E(2024-26E)2025E2024E2025E2026E2024-26ETAL*TAL.N14.411.912.147,7514,46819.645.3x29.4x18.7x55.7%0.5...
