Credit Suisse Playing Catch Up On Tarena, Upgrades To Outperform

Credit Suisse’s Zoe Zhao upgraded the rating for Tarena International Inc (ADR) TEDU from Neutral to Outperform, while raising the price target from $11.00 to $11.50. He mentioned that the company had adopted new measures to control credit risk from student loans.

Tarena aims to cap student loan exposure at a maximum of 15 percent of its total tuition revenue. The company would limit sales from promoting the instalment payment options.

Analyst Zoe Zhao expects the percentage of total students who borrow directly from Tarena to decline in 2016, 2017 and 2018 to 14 percent, 13 percent and 12 percent, and for bad debt expense to adversely impact margin by 3.6 percent, 3.0 percent and 2.4 percent, respectively.

Tarena targets to recruit about 20 percent of students from referrals. If achieved, this could lower the per student acquisition cost by about 1.4 percent, Zhao mentioned.

In the report Credit Suisse noted, “Tarena will start to offer small-sized and advanced classes, likely with a lower utilisation rate during the initial rollout. The K-12 course has registered ~150 students in Beijing in the first month, below expectations. We trimmed 2016 GPM by 1%, and expect GPM to expand by 100 bp from core enrolment growth.”

The EPS estimates for FY16-FY18 have been raised by 1-3 percent to reflect “positive development in risk control and marketing efficiency,” the analyst added.