Acceleration in market share gains: Our AlphaWise survey indicated that the low price course strategy is highly effective for leading players to gain market share, thanks to their strong brand name, well established systems, standardized teaching procedures, and strong teaching curriculum development capabilities. We expect the promotional environment in China's K-12 after-school tutoring market will become a new norm, and the low user stickiness in the market will benefit the leading players like TAL and New Oriental, as they're considered top providers for potential switchers. We believe New Oriental's roll out of its low price strategy to over 30 cities and TAL's acceleration in capacity expansion will accelerate their market shares in the coming quarters. Although this may bring some short-term uncertainty to revenue growth and margins when the summer course revenues are booked, we believe this strategy is value accretive to the leading players given they can manage to achieve high retention rate.

Market demand remains robust amid macro slowdown: According to our AlphaWise survey results, K-12 after school tutoring expenses are the last item to cut among major household expenses during weak financial conditions. Moreover, 24% of respondents intend to increase their spending on tutoring classes in the next 12 months. This shows that education is not only resilient during macro downturns, but also remains a structurally growing sector in China. 

Good potential for online education: The survey results also show that the acceptance level of online education is very high and 43% of respondents thought online education was as good as offline, but more convenient. We believe this bodes well for future demand for the leading players' online and O2O initiatives, which could bring in incremental revenue opportunities with better operating leverage.

Eoin Treacy's view

Here is a link to the full report.

For most families education is the surest and in many cases only way to climb out of poverty. Despite the fact there is a great deal of debate about the best way to impart knowledge and indeed what should be prioritised in the West, Chinese parents are under no illusion, their child has to perform well in the state exam. Competition is such that the only way to ensure your child is getting the grades they need when you do not have knowledge/time yourself is to employ a tutor. 

Tutoring is not only a Chinese phenomenon, it is part and parcel of education in most countries as students, and their parents, compete for a limited number of places. My children’s school teaches a year ahead and they are on the Saxon math program which means they do a lot of questions. It is time consuming to check answers and supplement knowledge where necessary so as they progress it is looking like an inevitability they will eventually need tutors for something. 

My brother paid his way through university and a masters by tutoring maths and physics. I had another friend who paid for his doctorate by bringing freshmen business students up to speed on statistics. However the one-on-one business model is not scalable and online products are now predominating. 

In China that takes on an even more intense dimension because there is so much competition for university places and families make great sacrifices to pay for tutoring. Every year WeChat is filled with stories of the sacrifices families make for their children’s success and often of the disappointment when a child does not succeed or even kills themselves because of the stress.    

TAL Education has priced in a lot of good news recently and at least a pause and consolidation of powerful gains is now underway. 

New Oriental accelerated to last week’s peak and is also at least consolidating that move. 
2U Inc. is a US education software company which offers facilitation services for university online education platforms. The share broke out to new highs at the beginning of April and continues to extend its advance.