Shares of the leading Chinese private education company TAL Education Group (XRS, Financial) rose 45% during the fourth quarter and were up 64% on the year. Stock performance was driven by accelerating enrollment growth and improved margins on a favorable mix-shift towards smaller classes. We believe the company has ample opportunities for growth and expansion from the 19 cities it currently operates in, and that significant investments in the online course offerings will soon start bearing fruit. The spending on private education as a percent of GDP in China is considerably lower than that of the U.S. and other western countries, while the competition for admission to top universities is equally fierce, if not more. This dynamic should start to change as disposable incomes in China rise and the middle class continues to emerge. Given its strong reputation in math and science, high barriers to entry, and strong margin and cash flow characteristics, we think TAL Education is well positioned to benefit from this trend.
From Baron Funds' Global Advantage Fund letter for the fourth quarter 2015.
