TAL Education, New Oriental Have More Than 20% Upside

Education is hot in China as the country's tiger parents push their kids hard to excel academically in the hope of getting into top universities and gaining an advantage in a very competitive jobs market.

Given the money spent on ensuring kids' education it's perhaps little wonder that UOB Kay Hian has initiated research on China's education sector with an overweight rating and slapped buys on both TAL Education (TAL) and New Oriental Education (EDU).

The broker sees plenty of room for growth over coming years given the size of China's population and demand for good education. They especially like K12 after school tutoring (AST) given the large size of the market, its rapid growth and fragmented nature of the industry:

The K12 AST market is expected to grow at a 6-year CAGR of 12% to Rmb870b by 2020. An iResearch report values the K12 AST market at Rmb447b with a penetration rate of 57.5% in 2014. We forecast this market to grow to Rmb870b by 2020. Demand for test preparation classes for overseas studies is another catalyst. Studying abroad is a growing trend in China, driven by rising income and improving affordability

Here's why UOB Kay Hian reckons TAL Education is a buy:

TAL is in the sweet spot in China’s fast-growing education market. Its strong position in K12 after school tutoring is attributed to its reputation for quality services that produce top-scoring students. TAL’s fast growth is driven by aggressive capacity expansion and strong student enrolment. Revenue and non-GAAP EPS are expected to grow at a 3-year CAGR of 43.7% and 46.4% respectively during FY17-20. Initiate with BUY and target price of US$148.00 based on 1.2x FY19F PEG.

TAL shares are up 110% over the past year. The stock last traded at $116.47 a share.

And here's why the broker is bullish on New Oriental:

EDU’s growth is driven by strong demand for K12 after school tutoring, as well as test preparation courses designed for China students who plan to study abroad and for local universities. With its strong branding, good track record and huge learning centre network, market leader EDU is set to gain market share. We expect net profit to grow at a 3-year (FY16-19) CAGR of 29.4%. Initiate with BUY and target price of US$86.00 based on 1.2x FY18F PEG, or 35.6x FY18F PE.

New Oriental shares have advanced 70% over the past year. The stock last traded at $71.67 a share.