TEDU - Tarena International Is In Good Shape Following Cost-Cutting Measures

2023-04-21 17:22:30 ET

Summary

• Tarena International booked a $12.1 million net income for 2022, thanks to cost-cutting measures implemented in 2022.
• The enterprise value is negative and I think that 2023 is likely to be another profitable year for the company.
• I rate Tarena International as a speculative buy due to the geopolitical risk and its checkered past.

Introduction

I like to write about companies that lack coverage on SA, and today I'm taking a look at Tarena International (TEDU). It's a Chinese education company that currently has a negative enterprise value and it generated a net income of $12.1 million for 2022 following a successful cost-cutting program. I think that Tarena International looks undervalued from a fundamentals point of view and the regulatory risk seems limited as the company is included in the approved education providers list published by China's Ministry of Education. Let's review.

Overview of the business and financials

Tarena International is registered in the Cayman Islands and headquartered in Beijing, China. Its subsidiaries are involved in the provision of IT professional education and IT-focused supplementary STEAM education services in China for both adults and kids. The company provides IT training courses through a network of over 300 learning centers across more than 50 cities in China. Its IT-focused supplementary STEAM education programs include computer coding and robotics programming courses among others.

Tarena International has over 20 years of operating history and was the first IT education company in China to launch an online merge offline learning model. It's currently the largest provider of IT training services in China and it trained about 300,000 adults and kids in 2022.

In 2014, Tarena International completed an IPO on NASDAQ at $9 per share and its share price surpassed the $20 mark in July 2017. However, the share price slumped to below $1 by October 2019 as the company announced findings of revenue recognition and internal control issues. Financial reports had to be restated and several employees were fired. In December 2020, the company received a going private offer from its founder Shaoyun Han. The price offered was $4 per share which valued Tarena International at $230.6 million and it looked like a done deal. However, the valuations of Chinese education companies were put under pressure in mid-2021 as regulators announced in June the shutdown of the $120 billion K-12 after-school tutoring industry in the country. The business of Tarena International was not materially impacted by the government crackdown as the company doesn't focus on this segment but the going private transaction was shelved in late 2021 due to a breach of contract, sending the market valuation tumbling once again. In December 2021, the company announced a new ratio of 1 ADS representing 5 Class A ordinary shares which spooked investors even further as it created fears there could be a capital increase coming as this had the same effect as a 1/5 reverse ADS split. Tarena International launched a $2.5 million share buyback shortly after that but this failed to boost the market valuation. In my view, the reason this happened is the company hasn't repurchased a single share since the program was announced.

Turning our attention to the financial performance of the business, revenues increased by 3.4% to $357.8 million in 2022 despite the offline centers of Tarena International having to close for almost two months in Q4 due to COVID-19 restrictions. In addition, the gross profit margin improved to 57.2% from 49.7% a year earlier as the company closed several low-performing centers, slashing headcount by 20.5% year on year in the process. Tarena International also slashed marketing spending and reduced its sales and marketing staff which enabled it to get back in the black in 2022. The net income per ADR was $1.11, which puts the P/E at just 3.4x as of the time of writing.

Turning our attention to the balance sheet, Tarena International closed 2022 with $51.7 million in cash and cash equivalents and net debt was negative $44.1 million. However, I think it's concerning that the shareholders' equity was negative as the company had a significant amount of deferred revenues. The latter include mainly tuition fees which are collected in advance.

Looking at what to expect in the future, I think that Q1 2023 results are likely to be underwhelming as classes and non-essential operations were suspended in January due to COVID-19 restrictions. Tarena International expects to book net revenues of just 365 million to 380 million Chinese yuan renminbi ($53 million to $55.2 million) for the period, which represents a decrease of 39.1% to 41.5% compared to Q1 2022. However, I expect revenues for the full year to improve as COVID-19 restrictions have ended, and I think that the cost-cutting measures implemented in 2022 pave the way for another profitable year. In my view, a couple of profitable quarters could provide a boost for the share price and thus put the enterprise value in positive territory.

Risks

Turning our attention to the risks for the bull case, I think there are three major ones.

First, the perceived geopolitical risk is high as investors are concerned that China might launch another crackdown in the education sector in the future. In my view, the risk for Tarena International is low if this happens as the company announced in November 2022 that it was added to the list of approved education providers published by China's Ministry of Education.

Second, the lower marketing spending means that Tarena International is now relying on word-of-mouth referrals and this shift in strategy could lead to a decrease in revenues in the coming quarters. If this happens and the company decides to boost marketing expenses back to previous levels, margins are likely to be squeezed.

Three, the company's history of accounting issues could lead to many investors deciding to avoid its stock even if it remains profitable over the coming years.

Investor takeaway

The past couple of years have been turbulent for Tarena International investors but the business seems to be in good shape today thanks to cost-cutting measures implemented in 2022. I think that 2023 is likely to be another profitable year for the company and I expect the share price to receive a significant boost from strong results in Q2 and Q3. I rate Tarena International as a speculative buy due to the geopolitical risk and its checkered past.

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