Core viewpoints

Events:

1. TAL Education Group (TAL.US) FY21Q2 operating income is $1.103 billion (YoY+20.8%), net profit is $14.969 million (YoY+163.6%), and net profit of Non-GAAP is $52.276 million (YOY+881%).

2. The number of applicants for FY21Q2 long-term positive price course is 5.632 million (YoY+65%). As of FY21Q2, there are 936 teaching centers, covering 91 cities.

3. FY21Q3 guidelines: revenue range is expected to be $10.61 to $1.094 billion, YOY+28%~32%.

Comments:

1. Revenue of US $1.1 billion increased by 21%, and sales expenses increased to US $380 million.

Revenue was in line with expectations: FY21Q2 had revenue of $1.103 billion and YoY+20.8%, posted a quarterly guidance cap of $1.11 billion.

Year-on-year decline in gross profit margin year-on-year 3pct:FY21Q2 main business cost is US $522 million, YoY+29.1%, gross profit is US $581 million, YoY+14.3%; gross profit is 52.7%, 3pct is lower than the same period last year. The increase in cost and the decline in gross profit margin are mainly due to the increase in teachers' salaries, rental costs, and the cost of learning materials.

The sales expense rate increased significantly: FY21Q2 sales expenses was $380 million (YoY+44.3%), and the sales expense rate was 34.4%, an increase in 5.6pct over the same period last year, mainly due to marketing expenses and higher salaries of sales and marketing personnel.

Administrative expenses: FY21Q2 administrative expenses are US $254 million (YoY+33.5%), and the rate of administrative expenses is 23%, which is higher than that of the same period last year (2.2pct). The Non-GAAP management fee (excluding equity incentive expenses) is $226 million (YoY+36.5%).

Operating margin has declined: FY21Q2's operating profit is-$49.116 million, YoY-180.8%, 's operating margin is-4.5%, down 11.1pct from a year earlier. Non-GAAP 's operating profit was-$11.809 million, while YoY-113.2%,non-GAAP 's operating margin was-1.1%, down 10.9pct from a year earlier.

Year-on-year improvement in FY21Q2 net profit margin: FY21Q2 net profit was $14.969 million, YoY+163.6%, net profit was 1.4%, up 3.9

pct;Non-GAAP net profit was $522.76 billion, YoY+881%,non-GAAP net profit was 4.7%, up 4.2

pct over the same period last year. The improvement in homing net profit was mainly due to ① FY21Q2's other income of $45.33 million, compared with-$55.555 million in the same period last year, which was mainly derived from VAT and social security fee deductions provided by the government during health events; the impairment loss on ② FY21Q2's long-term investment narrowed to $49.1 million, compared to $60.8 million in the same period last year.

Cash flow, capital expenditure: FY21Q2's net operating cash flow is approximately-$56.273 million; capital expenditure is approximately $67.8 million.

Cash, cash equivalents and short-term investments: at the end of the FY21Q2 period, the company's cash, cash equivalents and short-term investment balances were $2.79 billion and FY21Q1 was $2.91 billion.

Deferred income: as of the end of the FY21Q2 period, the company's deferred income balance was $1.17 billion. YoY+135.6%, 's small classes and online schools charged part of the autumn semester fees in advance.

2. The number of applicants for long-term regular price courses reached 5.63 million, with an increase of 65%, of which online schools exceeded 2.9 million, with an increase of 116%. Offline outlets suspended expansion, and online school income accounted for 26%, an increase of 87%.

The number of applicants increased by about 5.632 million for 65%:FY21Q2 long-term full price, compared with 3.413 million for the same period last year, YoY+65%.

Affected by public health events, the offline center will continue to expand faster in the future: by the end of FY21Q2, the company has opened a total of 936 teaching centers, an increase of 178 compared with the same period last year, including 716 excellent small class learning centers, 91 Mobike and Libu small class learning centers, and 129 Zhikang learning centers. By the end of FY21Q2, 91 cities (90 in China and 1 in the United States) were covered, an increase of 22 over the same period last year and 1 month-on-month increase (Xianyang).

Sub-business situation:

(1) small class business and others: the proportion of FY21Q2 small class and other business income in total income has dropped from 75% in the same period last year to 67% this year, corresponding to income of about US $740 million, YoY+8%/8% (in US dollars / RMB). Among them, the small class income accounts for 57% of the total income, and the corresponding income is about US $630 million, YoY+7%/7% (in US dollars / RMB). The ASP

YoY-19%/-18%, of FY21Q2 is mainly due to online and offline integration during health events, and the number of long-term positive-price classes is YoY+31%.

(2) 1-to-1 business: FY21Q2 1-to-1 business income accounts for about 7% of the total revenue, corresponding to about US $77 million, YoY+6%/6% (in US dollars / RMB). 1 to 1 business ASP

YoY+4%/4% (in US dollars / RMB).

(3) online school business: the proportion of FY21Q2 learning and thinking online school business in total revenue has increased from 17% in the same period last year to 26%, corresponding income is about US $290 million, YoY+87%/88% (in US dollars / RMB), long-term positive price course enrollment exceeds 2.9 million, YoY+116%,ASP

YoY+1%/1% (in US dollars / RMB).

3. Profit forecast and valuation:In the short term, with the resumption of offline classes in primary and secondary schools in most parts of the country since September, we believe that the impact of public health events on the company's offline training business may further fade, leading to a rebound in Q3 and Q4 revenue and profits. In the medium to long term, in terms of ① online, management mentioned in the earnings call that it would increase investment in "local online schools" (local content, local teachers, local students, local services). Considering the company's advantages in teacher supply, content research and development, brand influence, etc., we are optimistic about the development prospect of the company to maintain the leading position of online K12. ② offline, K12 training market during the public health event to accelerate clearance, the future concentration will still be enhanced, good for the leader. According to consensus expectations, the company's FY2021-FY2023 net profit is US $3.16max 6.41 / 1.049 billion, EPS is US $0.53pm, and PE is 125.8max 62.0max 37.9X.

Risk hints: the risk of public health events, the risk of stricter extracurricular training policy, the risk of less than expected increase in the number of students, the risk of intensified competition in the online education industry, the risk that entity center expansion is less than expected, the risk of exchange rate fluctuations, the risk of intensified market competition, the risk of downward shift of valuation center, and so on.