Andy Li's  Instablog

Goldman Sachs' Report

Source of opportunity
We upgrade Ambow to Buy post the stock’s recent correction and add it to the Asia Pacific Conviction Buy
list. Ambow is one of the largest players in China supplementary education, and we forecast its K-12 tutoring
and career enhancement services (two-thirds of revenues in 2010) to drive 20% 2010-2013E earnings
CAGR. We view the stock’s recent significant correction (from liquidity constraints and sector weakness) as
unwarranted, given fundamentals appear intact, with 4Q10 results exceeding expectations. At current levels,
Ambow trades at 12X 2011E non-GAAP P/E, or 45%/60% discounts to Xueda/New Oriental. Our $12 12-m
TP implies c.50% upside.
Catalyst
1) Ambow has executed on track post IPO in Aug 2010, which should ease investors’ concern over its
historically M&A driven business model. Ambow beat our 4Q10 revenue and EPS estimates by 10%, and
guided 1Q11 revenue 10% ahead of our forecast. The company plans to add a substantial number of
learning centers organically in 2011, (40 on top of the existing 131), accelerating its expansion. 2) We believe
the market will appreciate Ambow’s differentiated career enhancement business, which targets high-end IT
training and leverages its cooperation with local govt.
Valuation
We raise our 2011E revenue forecast by 9% but lower our margin assumption on faster expansion. We have
adjusted our 2011/2012E EPADS by -4%/+3% and introduce 2013E EPADS of $0.96. We maintain our 12-m
target price of $12, derived from P/E-based SOTP. We apply 18X 2011 P/E to the tutoring business’s non-
GAAP NOPAT, 25X to career enhancement services, and 10X on K-12 schools and colleges. Our M&A
scenario analysis would add $4 to Ambow’s base-case DCF value of $16.7.