TAL Education Facing Margin Pressure; Brean Steps To The Sidelines

Brean Capital has downgraded TAL Education Group (ADR)

to Hold from Buy on greater-than-expected margin pressures. TAL Education reported fourth quarter non-GAAP operating margin of 14.4 percent, down from 16.4 percent a year-ago. Gross margin also declined to 49.3 percent from 52 percent last year. "The company's continued investments from O2O and more rapid geographic/network expansion should pressure margins in FY2017, though we believe these investments should support the company's market positioning in K12 and strong revenue growth over the longer-term," analyst Anne Shih wrote in a note. In addition, the analyst believes that First Leap Education acquisition and proportionally greater contributions from one-on-one and online classes should weigh on XRS' margins longer-term. However, Shih remains fundamentally positive on the company's strategy of increasing market share in K12 over the next few years and expectations of sustained mid- to longer-term revenue growth of about 30 percent YoY. Meanwhile, TAL Education's fourth quarter non-GAAP EPS of $0.23 topped Street by penny and revenue grew 42.1 percent to $175.0 million, beating consensus estimates of $168.0 million. Beijing, China-based company also provided strong first quarter revenue guidance of $181.1 million to $183.2 million, exceeding consensus' estimate of $174.3 million. "However, given the stock's rapid recent ascent but upcoming further margin pressures we choose to step to the sidelines, waiting for a better entry point and/or improved visibility on timing for margin recovery," Shih added. ADRs of TAL Education were up 0.67 percent to $54.87.