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DISCLAIMER
This report is prepared by TCS Capital Management LLC (TCS Capital, or TCS) and is not intended to constitute
investment advice. TCS Capital has a significant ownership position in Xuedas equity and has received no
compensation for this report. The information in this report has been compiled by TCS, and while it has been obtained
from sources deemed to be reliable, no guarantee is made with respect to its accuracy. TCS Capital accepts no liability
whatsoever for any direct, indirect, consequential or other loss arising from any use of this presentation and/or further
communication in relation to this document.
Use of this presentation is at your own risk. You should do your own research and due diligence before making any
investment decision with respect to securities covered herein. Following publication of any report, TCS intends to
continue transacting in the securities covered herein, and may be long, short, or neutral at any time. This is not an
offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in
any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.
The information contained herein is presented "as is," without warranty of any kind whether express or implied. TCS
makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information
or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without
notice, and TCS does not undertake to update or supplement this report or any of the information contained herein.
Transaction Background
In April 2015, Insight Investment Company proposed to buy Xueda for $3.38/share. Disturbingly, Xuedas CEO and
the other co-founders subsequently joined Insights bid.
At $3.38/share, Insights offer implies NEGATIVE VALUE for Xuedas business. In essence, the Insight consortium is
trying to buy Xueda from public shareholders for less than the value of the Companys actual cash on hand.
It is our belief that the bidders are using Insight, which is a Shenzhen-listed shell, as a vehicle to squeeze out
minority shareholders and list Xueda on the Chinese domestic stock exchange where public companies often
benefit from unusually high market valuations.
To appropriately value Xueda equity, the Board, at a minimum, must include both the net cash on Xuedas balance
sheet and the value of the Companys business operations.
Xueda had approximately $4/share in net cash as of 3/31/2015 (including long-term investments and excluding
dividends), which is materially above the Insight offer of $3.38/share.
In addition, we believe Xuedas business is growing and profitable, with over $340m of revenue. We have
calculated, based on our conservative estimates, that Xuedas ongoing operations have substantial value of at least
$3-$4 per share.
The Insight proposal is not only below Xuedas cash balance, but it attributes ZERO value for the Companys
substantial business operations, which we believe are entering a period of renewed growth and profitability.
We believe it would be unprecedented for a board of directors to approve a transaction at such a low price.
After a long period of poor execution, we believe that Xuedas business has begun to stabilize, but that its market
valuation remains depressed.
Management meets
investors on US roadshow
with upbeat presentation.
$8.00
4Q/2013 results
released; 2014
guidance below
expectations.
$7.00
$6.00
$3.00
$2.00
Company impacted
by doublediscounting; cuts
full-year guidance.
Company receives
Insight proposal.
Company lowers
guidance again;
stock trades below
cash value.
$5.00
$4.00
Revenue growth
slows to 1.6% in
Q1/2014.
Management joins
Insight group; Special
Committee formed.
$1.00
After a challenging period of weak financial results triggered by management missteps, Xueda has recently shown
improved revenue and profit margins.
To estimate the Companys 2015 revenue and profitability, we believe it is reasonable to assume that the business
begins to return to the historical/normalized growth and profitability that preceded the double-discounting
period.
2012
Average Enrollment (000s)
% Growth
2013
2014
2015E
2016E
2017E
2015 PF
(1)
58.2
65.4
12.4%
69.2
5.7%
71.2
3.0%
74.1
4.0%
76.3
3.0%
71.2
3.0%
ARPS
% Growth
$5,037
$5,306
5.3%
$4,892
(7.8%)
$4,819
(1.5%)
$5,011
4.0%
$5,112
2.0%
$5,200
Revenue
% Growth
$293.2
$347.0
18.4%
$338.3
(2.5%)
$343.2
1.5%
$371.2
8.2%
$390.0
5.1%
$370.4
9.5%
73.5
107.1
45.7%
30.9%
83.7
(21.8%)
24.7%
82.0
(2.0%)
23.9%
94.7
15.4%
25.5%
103.4
9.2%
26.5%
103.7
$40.7
169.5%
11.7%
$8.7
(78.8%)
2.6%
$12.0
38.7%
3.5%
$24.0
100.0%
6.5%
$30.0
25.0%
7.7%
$25.9
$40.7
(10.5)
0.0
8.1
(8.3)
0.0
$30.0
$8.7
(11.3)
0.0
(7.2)
(3.7)
0.0
($13.6)
$12.0
(8.0)
0.0
3.0
(1.1)
0.0
$5.9
$24.0
(8.0)
0.0
4.0
(3.0)
0.0
$17.0
$30.0
(8.0)
0.0
4.0
(4.0)
0.0
$22.0
$25.9
(8.0)
0.0
3.0
(3.2)
0.0
$17.7
Gross Profit
% Growth
% Gross Margin
25.1%
Adj. EBITDA
% Growth
% Margin
$15.1
Adj EBITDA
Capex
Interest
Change in Working Capital
Taxes
Other
Free Cash Flow
$15.1
(19.1)
0.0
36.0
(2.9)
0.0
$29.1
5.2%
28.0%
7.0%
The following slides use common valuation techniques with publicly available information to show a range of
potential values for Xuedas business.
The average publicly-traded Chinese education company trades at a multiple of 15x 2015 estimated EBITDA.
Using this average multiple would imply a value of $10/share for Xueda.
Note that we have excluded below education companies that are listed on the Chinese domestic stock exchange.
These companies often trade at extraordinary valuation multiples. For example, Guangdong Qtone Education
trades at 47x 2015E EV/sales and 145x 2015E EBITDA.
Because Xueda is growing more slowly than its peers, we conservatively use an 8x multiple of 2015 estimated
EBITDA. We also adjusted revenue and EBITDA to exclude the one-time impact of the recent double-discounting to
reflect what we believe to be the true earnings power of the enterprise, which would imply a fair value of more
than $7/share for Xueda.
Market
Stock Price
Peer Company
TAL Education
Tarena
New Oriental
China Distance
Guangdong Qtone Education
$36.19
12.25
23.85
15.81
24.84
Cap.
$2,877
711
3,759
571
5,313
of Mkt Cap
9.2%
23.6%
34.8%
20.1%
0.6%
Revenue
2014
2015E
$434
136
1,192
97
31
$582
184
1,341
118
112
Revenue Growth
2015E
2016E
$761 34.1%
239 35.3%
1,549 12.5%
149 21.6%
210 256.3%
30.8%
29.9%
15.5%
26.3%
88.6%
2016E
22.0%
21.9%
$338
$370
(1)
(1)
$389
25.6%
28.1%
9.5%
5.0%
$86
30
223
28
7
$9
TEV / EBITDA
2015E
2016E
$119
41
232
32
36
$166
61
282
43
75
(1)
$26
(1)
$31
2016E
2014
2015E
30.5x
18.1x
11.0x
16.6x
705.7x
21.9x
13.2x
10.6x
14.4x
145.2x
15.7x
8.9x
8.7x
10.6x
70.6x
19.0x
17.3x
15.0x
13.8x
11.0x
9.7x
-3.3x
-1.1x
-0.9x
$212
($29)
$10.15
$637
$390
45.1x
15.0x
12.8x
$7.24
454
207
24.0x
8.0x
6.8x
$3.38
116.4%
25.9%
27.9%
Adj. EBITDA
2014
(1)
USD in Millions. Comparable company estimates based on consensus numbers and Bloomberg data. Stock prices as of 5/26/15.
(1) Xuedas 2015E and 2016E Revenue and EBITDA adjusted for impact of double-discounting in 2014/15 periods.
We believe Xueda can also be valued using the multiples of comparable M&A transactions.
Using the multiples of recent Chinese digital/education transactions, Xuedas implied fair value would be more
than $7/share based on 8x forward EBITDA.(1)
Market
Target Company
Alibaba.com
ChinaEDU
Focus Media
Giant Interactive
Jiayuan
Noah Education
Perfect World
Shanda Games
Tudou Holdings
Acquirer
Alibaba Group (Parent)
Rainbow Education
Private Equity Consortium
Baring Private Equity / Consortium
Vast Profit
Consortium
Consortium
Consortium
Youku
Average
Median
Capitalization
$8,843
66
3,699
2,964
161
107
1,023
1,928
1,050
Enterprise TEV/Forward
Value
$8,584
27
2,869
2,333
91
21
548
1,743
925
EBITDA
Completion
Date
20.2x
6/21/2012
2.8x
4/24/2014
8.2x
5/23/2013
8.5x
7/21/2014
9.1x Offer under review
3.0x
7/31/2014
5.8x
2H2015
8.3x
2H2015
(10x sales)
8/23/2012
Xueda Implied Price
8.2x
$7.34
8.2x
$7.34
Conclusions on Valuation
Insights proposal implies a NEGATIVE VALUE for Xuedas business and does not reflect the full value of Xuedas
cash on hand.
To value the Company appropriately, the Board must consider the value of the Companys business and the net
cash on its balance sheet.
Our conservative, in-depth analysis shows that Xuedas on-going business is at least $3-$4/share based on
comparable publicly-traded company valuations and transaction precedents. In addition, the Company has
$4/share in cash which must be included in the aggregate valuation.
We believe the Company has ample capacity to buy-out its minority shareholders at $7/share (requiring
$185 million cash outlay) or to alternatively consider a large special dividend or tender offer -- a result that
would maximize value for all shareholders (not just the co-founders and Insight).
In addition, for the benefit of all shareholders, we recommend that the Board immediately undertake a
thorough evaluation of strategic alternatives, including a comprehensive auction process targeting other
industry buyers who could pay a substantially higher price for the Company.
It is also important to note that the Board only has six directors three of whom are co-founders. We do
not believe the Board has adequate independent representation.