For those not familiar with Robert Karr, he’s the founder of Joho Capital and is a Tiger Cub, which means he learned under Julian Robertson. He launched Joho Capital in 1996 and has returned an annualized 22% since inception. Karr’s portfolio is concentrated, and he currently only owns 13 stocks. He’s playing heavily in the Chinese education market. His fund’s biggest position is New Education Ed (EDU), which makes up nearly 27% of his portfolio. He’s not the only guru in New Education Ed. Fellow Tiger Cub, Steve Mandel, owns more than 7% of the company and George Soros also owns a small position. I haven’t looked at EDU yet, but the fact that Karr and Mandel own 12% of the company puts it on the research list.
Karr also owns large positions in Mindray Medical (MR) and Yahoo (YHOO), presumably for their stake in Alibaba. He’s obviously bullish on Asia.
Let’s look at Tal Education. They’re a China-based tutoring company focused on K-12. They’ll do work in classrooms, online, and one-on-one. Their IPO was on October 20 and was priced at $15. They released earnings on the 25th, and Karr must have liked what he saw. He reported purchasing an additional 4% of the company the next day.
Earnings for the quarter were great. Net revenue increased by 48% YoY. Operating earnings increased nearly 8%, student enrollment went up 25% and they began operations to six cities. Their student enrollment is up by nearly 100,000 just for the quarter.
There were some concerns as well. Yundong Cau, who founded Tal in 2003, resigned due to personal reasons. It’s unclear if this is a positive or negative over the long-term, but it was the reason for the share price drop. It appears as if the resignation was relatively unexpected by the market, but Cau did release a statement the day after earnings. He said that he was surprised by the reaction, but since he was still a large shareholder, investors should take comfort in that. Cau hasn’t been involved in the day to day operations since 2009, so there shouldn’t be any transition issues. A director released a statement saying they were forced to make the announcement because of SEC requirements, and not because the situation had changed. Later, that same director again released a statement saying there had been an internal struggle, and Cau had left because of that. The details sound juicy, and since I don’t have any additional information, I’ll let you read the speculation on it yourself by following this link.
Besides the apparent internal struggle, the other concern is that the market cap for Tal is nearly $1 billion, but the run-rate for annual revenue is only $100 million, and net income for the year looks like it will only be around $20 million. Growth has been dramatic, but there is certainly a premium already baked into the stock to account for that growth. The long term demographics for the industry seem to be great. You’ve got a large country with parents who care deeply about educating their children, and you’ve also got a rising middle class who have the income to pay for tutoring. There are some competitors out there, though, and it remains to be seen how many companies the market will support.
Tal is one of those under that radar companies with little coverage. Although it appears that two analysts are covering the stock, I was unable to track down those reports to review them. Tiger Cubs seem to be all over this one, though. In addition to Karr and Mandel, Chase Coleman’s Tiger Global also is a big owner. His ownership goes back to 2009, so he may have been the first of the group with the idea. If you decide to get in, you need to be following the buys and sells of these guys. Current valuation makes it hard to justify the market cap, in my opinion, so Karr and the others must know something that we don’t.