Ladies and gentlemen, thank you for standing by and welcome to TAL Education Group’s Third Fiscal Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s call will include question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday 19th of January, 2017. I would now like to hand the conference over to your speaker host today, Ms. Mei Li. Thank you. Please go ahead.

Thank you all for joining us today for TAL Education Group’s third fiscal quarter 2017 earnings conference call. The third fiscal quarter earnings release was distributed earlier today and you may find a copy on the Company IR website or through the newswires. During this call, you will hear from Chief Financial Officer, Mr. Rong Luo. Following his prepared remarks, Mr. Luo will be available to answer your questions. Before we continue, please note that the discussions today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in public filings with the SEC. For more information about these risks and uncertainties, please refer to our filings with SEC. Also, our earnings release in this call includes discussions of certain non-GAAP financial measures. Please refer to our earnings release which contains a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures. I would now like to turn the call over to Mr. Rong Luo.

Thank you, Mei. And thank you all for joining us on our earning conference call for the third fiscal quarter 2017. In the third quarter, we are happy to see revenue growth exceeding our expectation, mainly driven by the strong enrollment growth across all business lines. Once again, this quarter we saw renminbi depreciating significantly against the U.S. dollar. Despite this negativity impact, in dollar terms, topline revenue growth was 83.3% to US$260.6 million, ahead of our expectations. In renminbi terms, the net revenue grew by 94.5% year-on-year. The strong revenue growth was supported by two key reasons. First, on top of the ongoing strong momentum of our core small class across all cities, we’re enjoying an extra push from growth from the classroom capacity that we have added in the past few quarters. This added capacity gradually [ph] gets better utilized and we also see the more and more new students. [Ph] The second major factor boosting our topline in the third quarter was the contribution from a newly acquired business. Firstleap and Shunshun in particular, which were not yet consolidated last year but [indiscernible] and contributed more revenue than expected in the third quarter. Non-GAAP operating profit increased by 93.1% year-on-year, also above our expectation. Now, let me briefly review our operational progress for the quarter. After that, I will provide some further analysis of the financials and our business outlook. Firstly, let me clarify that we break out revenue by small class, one-on-one and online courses. Small class including Xueersi Peiyou, Firstleap, Mobby and some other educational programs and services; one-on-one including Zhikang one-on-one and Shunshun overseas consultancy businesses. Online classes are from xueersi.com. Other revenue are mostly from online community business. In the third quarter, small class accounting for 85% of total net revenue, compared to…

Thank you. [Operator Instructions] Our first question comes from the line of Zoe Zhao of Credit Suisse. Please ask your question.

Hi. Thank you, management for taking my question and congratulations on a very strong quarter. So, I have two questions. The first one is on the very high revenue growth. Could management share with us a bit on the organic part and the acquisition part in terms of the revenue mix, and what your revenue growth [ph] looks in the coming fiscal year? And the second question is on the capacity expansion, especially on Firstleap. It seems that the number of learning centers has doubled in the past quarter. So, what’s our plan there and how would it affect our gross profit margin as it seems to be expanding again? Thank you.

Thank you, Zoe. For Q3, the top-line revenue growth is higher than our expectations. I think one of the important reasons is the newly acquired business is actually doing quite well and they don’t have any year-after-year comparison in last year because we just acquired in this year. In particular, the Firstleap is also growing quite well and in the first one or two quarters they are around 5% of my business; today, they are around over 6% of my business now. And we’re also seeing we have some new acquisitions in this year, for example, our Shunshun, which contributed a little bit in my revenue but also compared to last year we don’t have anything which is also a plus for us. So, the newly acquired business is growing quite very strong in regions for us. Secondly is if you still remember, last year Q3 and Q4, we started add to more capacities, classrooms in the places we have huge demand and we also have very capacity fulfillment rates. So, in general, it takes two to three quarters for these centers to go to fully utilize. The peak time for them is summer and we also have to see full summer in [indiscernible] they are also going quite well. So, all of this has proved the newly added capacities have been success in the past few quarters. And so looking forward to Q4 and the coming year, I think especially for Q4, I think in general, there will be similar to the case in Q3 but please keep in mind last year actually we have acquired Firstleap already in Q4, so the comparison is a little bit different. So, Q4 guidance today is a little bit lower than Q3, but still maintaining a very healthy and very strong growth…

Thank you. Our next question comes from the line of Claire Cao from Morgan Stanley. Please ask your question.

My question is regarding the margin. We see margin expansion in the quarter. And can management help us to break down the margin, the gross margin for the core business and for the newly acquired business? And also how should we think about the future margin trend in coming quarters? Thank you.

Thank you, Claire. I think in general for Q3 and even for the coming quarter Q4, our mainstream business is continue to be stable in margin and even improve a little bit if new the capacities added last year and last few quarters have to utilize. That will give us more positive signs in the margin studies. And the newly acquired business including Firstleap and Shunshun, especially Shunshun actually [indiscernible] because they are unique revenue recognition room. Every year if they sign more contracts, actually they pay the sales and marketing, they can put them in deferred revenue, only when their students get their offers in the visa and go to study abroad, which is typically 10 to 12 months, we cannot recognize any revenue. So, they will create a delay over there. So this year, I think the newly acquired business, actually much expected is negative [indiscernible]. And looking forward to next year, there will be better and better. So going to next year, I think the newly acquired part will be a little bit better. But we will continue to invest in technology and new platforms. That’s the only way for us to be scalable all over China. So, our mission is we will leverage the science and technology to advance education. So that is the place we will continue to invest. And we also will continue to adding more capacities based on market demand and all of this will be -- have a little bit negative impact in my margin. So, I think we both have some good things and some pros and corns, some cushions and some challenges there. So, coming to today, I can’t give a very clear guidance what margin will be for next year. I think next quarter will be the good time to talk about that or after we finalize all the budgets.

Thank you. Our next question comes from the line of Fan Liu from Goldman Sachs. Please ask your question.

Thank you, management for taking my question. So, I have two questions, and number one is about regulation front. So, there were recently some update on the 13th five-year education plan and also the education, promoting law for private education. So, how do you assess the impact on you guys and also on the sector and the competition side? And also second question is about your capacity expansion. So, if we see, in the previous years, actually you -- before the fiscal year 2016, you actually expanded network at very cautious level, a very -- like single digits increase in terms of number of learning centers. But from fiscal year 2016, you increased the capacity at 40% to 50% in terms of seat. So, what’s really behind this kind of capacity expansion plant, so what drives your motivation to accelerate expansion of the network?

The first question about the regulation, we also saw the news about what happens in Shanghai and we also saw the new incentive policies which just released in Beijing. And just today, we also see some new policies coming from the central government level to give more flexibility for the private education sectors. So, I think all of this information combined together, actually they deliver a very clear message, which is the government will spend more attention and more time on this industry and they wish the players in this sector can continue to deliver high quality services and to students. And we as one of the players in this industry, we fully agree and we will -- we also follow the government interactions to try to improve our operations and continue to provide high quality services to the students. And we also believe the government interactions and the government demonstrations on this industry will help especially when the market is very fragmented. For example in Beijing, Shanghai there are thousands of thousands private companies here. So, I think if the government regulation is try to make -- will make the whole sector more healthy and more sustainable. And we also -- the government for example the national reform and development council to set task and new initiative. For example, we launched online platform called xueersi.com, which you have provide free education services to the developing provinces in China. So, they continue to do the things like that, try to have more people and more students all over China. And in general, we believe a way -- as a player in this industry, we want to present and we will follow the government interactions to improve our operation and we also will try our best to help more students and…

Thank you. Our next question comes from the line of Shawn Yang [ph] from CICC. Please ask your question.

I have two questions. The first one is, could you please provide more color on the price range of Firstleap in terms of the per hour price of the classes? And the second one is how much marketing dollar increase there was -- during the quarter was related to Shunshun?

Okay. The first question, I think for the Firstleap, their price is similar to the price of the Rising Edge, [ph] which is the market leader in Beijing. I think the price range from 120 to 140 per hour. And compared to small class, actually Peiyou, the price is a little bit higher. And the marketing dollars we have spending on Shunshun, when they acquire new students I think that still is material part in the percentage of net revenue percentage. So, let me repeat again for the service model is every year, they sign a contract for students, they need to pay the sales and marketing to the channels who provide students and they can now recognize any revenues, so they have a delay. In the long run, looking to next year, we feel quite good about it.

Thank you. Next question comes from the line of Terry Chen from HSBC. Please go ahead.

In your prepared remarks, Rong Luo, you mentioned that promotion for the winter classes helped the growth in Beijing. So, I was just curious about your promotion strategy going forward. Will we see more promotion in smaller cities? Thank you very much.

Thank you, Terry. I think our summer promotion actually is quite successful. And the winter promotion is ongoing today. So, it’s too early to judge whether they are good or not. But based on a number what we see, actually we have seen the students take more subjects than what they did in the past. So I think the promotion is very -- it’s one of the two when you can try to get more market share. Only in the cities we have more empty space for example Beijing, the fulfillment actually is lower than the other cities, so we have the benefit [ph] to do that. And today we don’t have any -- we don’t have a B plan to say we want to do promotions all over China because actually we don’t have that much space there. But what we can say is in Beijing, based on the costs of the promotion in the past two years in summer, we probably would try some new ways to do promotions in winter and we will probably continue to do that in summer based on very good results. But I don’t think the promotions will be a nationwide campaign for us in the coming year. All of this promotion is based on different factors in the city and we evaluate them very carefully. Only when we believe the promotion can help in both the enrollments revenue and profitability, we will do that; otherwise we will be very cautious.

Our next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.

The question is related to the future expansion. And we do realize China does need a lot of the education [indiscernible] and in fact this expansion give from you guys is pretty rapid. And you know already once you are 27 cities and soon probably will go on to 14 cities, reaching the level of China Oriental. And I think that during this expansion from a progress experience of your peers, once you’re reaching the scale, you may face the challenges of management capacity and actually you are going to -- you have to manage so many learning centers in so many cities. So, I wonder what kind of a management capacity does TAL have, put in place to manage the upcoming, growing learning centers. That’s my question.

Thank you, Tian. In the first place, actually our expansion model is different from my peers and they quickly enter more than 50 cities in a very short time but actually we have been running the Company for 14 years now, we only have 27 cities, every year enter around 4 to 6 cities. And secondly is actually our model is based on big platforms, centralized version and functions we have established in Beijing. The new learning centers in the new city, actually they look like KFC sauce. So, they are not full function school, they focus on delivery to the students. So, when we feel the platform and when we feel the centralized function stronger and stronger, so our expansions will be a little bit easier than the other companies. And in then, I also quite agree with you, when we expand a little bit faster than before, it requires more and more talents in management perspective. So, we are very happy to see we have some lessons learned, year 2002 [ph] if you guys have a number at that time. So in the year 2013 and in the first half of 2014, actually we don’t enter any new cities. We stopped there and we focused on improving our management platforms. So, that way have established our mechanism, every year we would train a lot of the new school helps [ph] in our training sections. So, we give them training as two years before they could be a school help and we also train the similar level of different management people there. So, we have established a big pipeline for that. So, we believe in the coming several years, if we continue to increase the penetration to the new cities of four to six every year, we feel that’s still on track. And again, thank you so much for your reminders, we also keep that in mind. And we also establish KPIs and metrics to go into -- how the new city is. So, based on all of these monitors to decide whether we should do more or whether we should not. We have a very important system to let them out. So, as a Company, again managing healthy growth is obviously our top priority. So, we will keep all your reminders in mind to make sure we don’t make mistakes. Thank you again.

Thank you. Our next question comes from the line of Mariana Kou from CLSA. Please go ahead.

Thanks. Congratulations on the strong set of results, again. My question is actually a bit more looking back into the quarter results, because I noticed that -- I think if hear that correctly just now, the one-on-one portion actually came down a bit but then the GAAP ASP actually increased this quarter. So, I think could it be fair to assume that it’s mostly coming from Firstleap? And if that’s the case, the next quarter, given that the base -- Q4, we already got Firstleap, we shouldn’t be expecting on a GAAP basis an ASP increase?

Yes. Let me clarify. Your question is actually about my ASP, right?

Yes, ASP, on blend ASP, because it seems like Firstleap did help quite a bit this quarter, so for next quarter, given we have like-for-like comparison, can we expect…

Okay.

That’s what the question is.

Yes, okay. So I think...

No, please go ahead.

Okay. Thank you, Mariana. In the first place, I strongly recommend and encourage you guys to spin your model little bit, don’t use the blended ASP [ph], sometimes it’s misleading. And so, I give you more discretions on ASP per segment. The Peiyou small class ASP actually is increasing by low single-digit, because there were cities including Beijing, Shenzhen and Guangzhou, the major cities there. And firstly because we don’t have year-over-year comparison last year and they only -- the students in Firstleap, they only pay us once a year. So, the ASP is higher. So, when they have mix, the ASP will be just a little bit higher. And for the long run, the Zhikang one-on-one, actually the ASPs grew by 3.2% and considering we have offered the high price products in the big cities. The online ASP is also increasing by high single digits because the live class platform. Live class ASP is a little bit higher than the pre-recorded content. And today, we have seen more than half of the revenues coming from the live. So looking forward, I think we will, all of these three segments will maintain similar trend this year. The forecast will be low single-digit; the one-on-one will be similar and the online will continue to be low single-digit increase. I think that’s the trend to go in the coming year.

Thanks. And also more on the margin side, so the past two quarters we have been consistent in adding, similar I think in terms of classroom. And this year -- this quarter in particular, I think definitely came up much better on a non-GAAP basis year-on-year increase. So, we see that as more of acceleration in terms of like enrollment, although enrollment number I think we have roughly in line with Q2, but then I think on the margin side it seems like really utilization in classrooms seems to be better?

Yes, you’re exactly right. I think the pace of adding more capacity is actually similar in the past four quarters. We don’t see slow down. So, in the Q3, we added around 32 Peiyou small class learning centers there. And looking forward, we will maintain a similar trend in Q3 -- in Q4, we plan to add around 30 to 40 new learning centers there. And the capacity actually -- when we have entered a new capacity, it takes us around two to three quarters to reach the level of the normal fulfillment rate. And in this Q3, we’re happy to see all the places we have added in the past several quarters now coming into fully utilized. So, that’s part of the reason why we can improve our gross margins this year -- in this quarter. So, the gross margin is a balance of how many -- capacity we’ve added in the past now coming to fully utilized and how many new classrooms and new capacity we try to add in this quarter and in the coming quarters. But in general, we believe our gross margin will be similar, will be quite stable in the coming several quarters. There are small up and downs, but in general, they will be quite stable.

Thanks. I think just I have one small question. I think we’ve kind of talked previously and analysts also asked about the Shunshun business in terms of seasonality. So, when the students actually get to go overseas, then we will start talking the revenue or would that be in the quarter and May or would that be in summer quarter and August?

Actually the revenue recognition of the Shunshun business is based on -- they need to get offer and they need to get the visa. So, I think in general, most of them will come to recognize maybe in Q3 or Q4 next fiscal quarter.

Thank you. Our next question comes from the line of Alex Liu from Daiwa. Please ask your question.

I have various groups of big picture questions. I think in the past 10 years, we see the new born population in selective cities, in Beijing and Shanghai and Guangzhou has been picking up quite notably. I think definitely demographic is one of the major factors contributing the overall industry growth along with the penetration of the tutoring and also the pace of industry consolidations. I’m just wondering what factor do you think is actually currently contributing the most of the growth for industry right now, any color would be helpful? Thank you.

Okay. Thank you for your question. I think the three facets you’ve mentioned including the new population including the penetration of tutoring and the consolidation of market are also very important to contribute to the high growth for the top players, not only us but also New Oriental. And frankly speaking, I don’t have a sense [ph] to report to keep your clear answers, which driver contributes more in this growth. What I can say is for the population perspective, actually we can see in Beijing every year we have more than 200,000 students coming to primary school, but years ago, it’s only around -- the number is only around 100,000 students. So, we are seeing more and more students of course born after the year 2008 and coming to the primary school and which have increased the pace for us. That’s also proved by the growth in our primary school students. We have seen a very strong demand coming from grade 1 to grade 3 students in primary school. And we believe that is very important for all over China and we are also happy to see the populations, the students in Beijing, Shanghai and Guangzhou, Shenzhen today are quite similar now. So, the penetration rate also is quite important, but I think Beijing and Shanghai, bit cities, I think the penetration rate increase is low-single-digit, because most of the students, they have been in tuition already. And the consolidation is also definitely one the most important reasons there. But this only happens in the big cities for example in Beijing and Shanghai. So, we believe all of these three factors continue to be very important growth drivers for us in the coming 5 to 10 years, if you consider k-12, actually it’s 12 years next cycle. So, we believe the whole sector will be in the good time. But what we need to do is actually win. We see these tremendous opportunities, we need to be very cautious, we need to continue to invest in technology and our system to try to make sure we can deliver the high quality services. And we also need to make sure, we not only cover students who pay us by also provide more, free services to the students who cannot be touched by us, but we can provide online offerings and other things to support them. So again, we believe all of these three factors are very important. And if I have more ideas about it, I would share with you.

Thank you very much. Just another housekeeping question. So, you recorded I think around 4 million impairment loss this quarter. I’m just wondering what type of investment is that impairment to about.

Yes. I think if you still remember, in year 2014 and year 2015, we invested some at that time, that is the starting point of the online education. So, we have invested some of the early stage projects. We don’t invest them in huge amount, for every deal, we only invested $1 million or $2 million, even less than that. So today, coming after two to three years, we have seen some them doing quite well and they are also highly connected to our business and we have lot of energy. And some of them is maybe not doing that well. So, from my studies, we always pay a conservative approach to look into all the investments. For the deals who we believe have some challenges or some very important difficulties, so we will pay them down. So that is normal practice. We also ask our auditors to make sure all the impairments are on check. So, all of this is a very small investment we have made in the past. Most of our investment deals are growing quite real and some of them you can also benchmark from public news. So again, looking forward, we will continue to be very cautious about all the investment we made and keep very close watch on any progress they make. We probably will continue to see our investment portfolio is performing quite well and we are also about to see if something is not going well, we will do some impairment. But in the short-term, we don’t have anything in our pipeline, that is based on quarter-by-quarter and review ways to auditor.

Thank you. Our last question comes from the line of Alvin Jiang from Deutsche Bank. Please go ahead.

I have two questions, the first one is on investment. We are happy to see that Firstleap and Shunshun both doing well after being acquired, can you share with us more clear on the investment going forward. Should we expect more direct contribution from investees and how to focus on your education ecosystem? Thank you.

Thank you, Alvin. Looking backwards, in the past 18 months, we have acquired some important companies and combined them into TAL family including Firstleap, including Shunshun and some of the small ones. And this is very important for us because they are helping us to establish international education sectors for me and that’s the new pillar of my Company’s growth. They may not be very material this year but coming two, three years’ time, they will become more important. So, actually we have finished several deals already and our current focus will be how we can integrate them into the TAL family. So, we spend a lot of time over there. And in the short term, we don’t have any big deals in my pipeline. And we don’t foresee any huge acquisition happening in the fourth quarter. What we need to do today is focus, focus, focus on integrations of current deals.

Got it, thank you. This is very helpful. And my second question is on double teacher assistance. How big is the revenue contribution now and also expectation on this system? And there are some news reports saying that maybe TAL will leverage the system to cooperate with local, small players to cover those and cover the cities. So, do you have any detail plan on that?

For the double teacher model, actually if you still remember, we are the first one to divide and put them into implication in this sector. So, we have very deep understanding about this model. We believe this model is very helpful, especially for us to penetrate the low tier cities and is also very helpful for us to cooperate with maybe low tier city players to provide more service to the other people. But, what I can say is the future is very bright and very good, but we also need to keep in mind, this model is also a new model, also in very early stage. And we continue to hunt down to make the work and continue to expand one city by one city, one learning center by one learning centers. Today -- by the end of the day, the revenue contribution or product contribution from them are still very material. So, we still continue to invest in technology and make sure, hope model better and better. We don’t hurry to try to expand this model to wider the geography. We will same as what we did in Xueersi Peiyou, we need to make sure one city, one learning center work and then we continued to do more expansions. So, we don’t foresee significant revenue contributions for double teacher models this year. And I will let you guys know the updates about what will happen in the coming two to three years.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.