Ladies and gentlemen, thank you for standing by and welcome to the TAL Education Group First Fiscal Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session [Operator Instructions] Please note, this call is been recorded today, 26th of July, 2016. I would now like to turn the call over to your first speaker today, Ms. Mei Li. Please go ahead.

Thank you, all, for joining us today for TAL Education Group's first fiscal quarter 2017 earnings conference call. The first 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 US 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 first fiscal quarter 2017. We continue to enjoying a very good top-line growth in the first quarter, driven by the high demand in all cities and supported by further capacity expansion. As happened in previous quarters, in this quarter we'll see the renminbi depreciates significantly against US dollars, despite this negative impact in dollar terms the top-line growth rate was 51%, 5-1, to $195 million ahead of our expectations. In renminbi terms, the net revenue grew by 58% year-on-year, also more than expected. Revenue growth was primarily driven by a strong 57% growth in enrollments across the board. Today, I will briefly review our operational progress in the first quarter, after that, I will provide some further analysis on the financials and our business outlook. Let me first recap our progress for each business segment. In the first quarter small class accounted for 83% of total revenue, compared to 77% in the same year ago period. Net revenue for small class was up by 69%, 6-9, in renminbi terms and 61% in dollar perspective. While enrollments increased by 61%. This is the first quarter that we have consolidate firstly for four quarter, firstly contributed more then 5% of total revenue, better than our expectation. Revenue generated from cities other than the top five, which is Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing, accounting for 35% of Peiyou small class revenue, an increase from 28% in the same quarter last year. As before, the other cities show higher growth momentums with net revenue in renminbi up by over 90%, 9-0, year-on-year. All of the 19 cities we have been since last year we achieved over 100% RMB terms of growth rate in nine cities, including…

Thank you, sir. We will now begin the question-and-answer session [Operator Instructions] The first question comes from the line of Claire Cao from Morgan Stanley. Please ask your question.

Hi, management. Thanks for taking my questions. I think you mentioned that we will remain very strong capacity expansion plan for fiscal year '17. So could you provide us with more details on the capacity expansion for each business line? And what percentage will be contributed by the addition of new cities? Also, given such aggressive expansion plan, how should we think about the margin outlook for the coming quarter as well as for the full year?

Thank you, Claire. In the first place, I think we already decided how much class rooms or how much capacity we look to add in the coming quarter. We need to consider two things. The first one is the market demand. Even today if you have time to read through most of cities we have offerings, actually we have see, we still have a lot of parents and students they are lying in front of our gates. Every year students enter in there, we push a lot of people away. So compare with the shorter market demand we have a long way making goal. In the second place, we need to consider our own capability. So because you have central teaching model, we are quite central as models. We were running these models for more years, actually we have made things more and more mature, so we will get some operating leverage. Now we are in the right time and right place to try to be a little bit to increase the speed of the new network developments there. So let me recast the numbers there, is in the first quarter the capacity has increased by 50%, in the fourth quarter, which last quarter is 51%. So which is around 768 class rooms and let me remind you last year Q1, actually we are only adding around 517 class rooms, so this is a very good number for us to show we are on the right track to grow even stronger. And of course, we probably will need to maintain a reasonable ongoing pace in network expansion. In the second quarter as I mentioned, in the prepared remarks, we plan to add between 20 and 30 small class learning centers based on the market demand. We probably will add most…

That’s very helpful. Thank you.

Thank you, Claire.

The next question comes from the line of Zoe Zhao from Credit Suisse. Please, ask your question.

Hi. Thank you, management, for taking my question. Just to follow up on the margin; can management share with us a bit of the different segments of operating margin, especially the online initiatives by the pre-recorded video, as well as the Hybean dynamics? Like how would they evolve and how the operating margin will kick in in the future? And secondly, on the O2O model expansion plan, what's our target for the rest of the three-quarters? Could management share about the number of learning centers that we plan to add? Thank you.

Thank you, Zoe. You are asking about how fast, and I think specifically about the margin guidance for the second quarter, I think we have some pros and cons, we have some positive things and we have some challenges. In the positive side, is we are happy to see all the capacity we're adding in the past two quarters, actually come into production very smoothly. I think the summer term, we are enjoying a very high growth rate in enrollments and across the country, not only in Beijing. And more and more of our class rooms they pull into production which is a very good benefit to our margin, because both the class rooms and the teachers before they don’t generate any revenue, but starting from summer, they are doing – they start to be very important generators. And the second thing, especially for the online, what I can share with you is, we are seeing a very positive enrolment in the online, especially in the Xueersi online school and Hybean which is the live broadcasting model and we believe the second quarter online will be a very good growth contributor, which is because we have seen all the registrations is growing quite significantly. So compared to the past quarters, this is also a good - its a kind of something positive and good things to happen. But at the same time, we will have some challenges, similar to Q2 to Q1 in the first places we are maintaining a similar range of the capacity expansion and for Q1 we - actually we are adding around 32 learning centers. And which is around 768 class rooms, which will also take some time to ramp up. And the second thing is for the new acquired business like for the Firstleap. We…

Yes, very helpful. Thank you.

Thank you, Zoe.

The next question comes from the line of Natalie Wu from CICC. Please ask your question.

Hi. Good evening, both Luo and Mei. Thanks for taking my questions and congratulations on strong quarter. So its mentioned that above your summer promotion programs, so just wondering can you share with us some color on your summer promotion this year, including enrollment, promotion district, go promoted subject, et cetera. And how do you project the retention rate in summer promotion into autumn course this year. Also, you mentioned that your net profit margin in the second quarter will be lower than last year. But just wondering, excluding the one-off items like the government subsidy, asset disposal, also impact from consolidation of lower margin business. So how shall we think of your, maybe, gross profit margin next quarter compared with a year ago? I also have a question about the enrolment in Beijing. So I record that enrolment in Beijing actually recovered last year, thanks to your summer promotion plan. Also your growth in Beijing managed to re-accelerate last quarter, if my calculation is correct. We all know that Beijing is already a very sophisticated city for K-12 up to Q3 market. So a strong growth for you guys maybe means that you are taking others' market share very aggressively I guess. So how should we think about how fast you can grow in Beijing this year? And how deeply that you can penetrate into this city in the mid to long term -- maybe in mid to long term?

Thank you, Natalie. In the first place welcome to our earnings call for the first time, in the second place you are asking four questions.

Sorry for that.

I'm happy to see that because you do a lot of work. So in the first place, I answer from the last question, that enrollment in Beijing, yes, you perhaps see that and our summer targeted promotions from last year summer - actually enrollment in Beijing is fast growing and it’s accelerated. The last year fall change is around 16% to 18% and the winter term is around 25% to 26% and this year twice, over 35%. And for summer term basis on a number we have seen today actually its even a little bit accelerated, but because you know, the summer term we have some kind of promotions in the first year, students for junior high, senior high, I can't comment too much in the numbers. But we believe when they have finished their retention from summer to fall, we have much maybe happy numbers to share. And yes, Beijing's penetration rate out for the tutoring is actually quite high, so that’s part of reason we believe the market players, the top players in this markets is actually very aggressive to consolidate the market. I think if you have benchmark our enrollment numbers - enrollment numbers in Beijing, adding together actually two companies, gaining more market share. We believe in the more mature market when parents are more picky on their - to select different school or companies to send their kids for tutoring, the coopering companies and the market players benefit. Where we believe that the market consolidation in Beijing market will – even accelerate in the coming years and we get ready for that. And the second answer to your margin, if we are taking off the one-off events, government subsidized, bla, bla, I think if we - some of this - is a little bit difficult…

Great. Thank you for details - detailed answers. Very helpful. Thank you.

Thank you, Natalie.

The next question comes from the line of Alvin Jiang from Deutsche Bank. Please ask your question.

Hi, Luo and Mei. Thank you for taking my questions. I have two quick questions. The first one is on your investment plan. Are you still going to continue the investment and acquisitions to other education companies? And do you expect these companies to contribute to your business in the short term, not only in financial terms, maybe in the ecosystem and other values? My second question is still on the margin side. Because we can see you are expanding into new business, like oversea test prep, and also your online business grows really fast. So how should we expect these parts of extra-fast business to impact your long-term margin? Thank you.

Yes. Thank you, Alvin. I think for acquisition, actually we all know its not easy to do acquisition. It’s not easy to try to consolidate two companies into one. And so every time we want to make acquisitions, actually we are very cautious. For example for the Firstleap, we have been in discussions for more than 18 months and Shunshun we have been in discussions for more than 12 months. And we need to be very cautious about every acquisition targets we want to make. And in the short term what I can say is, we don’t have any acquisition targets in the short term in my pipeline now because we need to - we need to spend some time to improve the consolidation integration between these new companies. We need to spend more time over there. And but in the longer term, we continue to look for some potential targets in these core [indiscernible] tough areas, not only in China, but also some potential targets outside China. But that’s kind of a long-term target. We always keep eyes opened to see some of the new models, or new products, new contents, new IPs, not only in China, but also in the states and other countries. And about your question regarding to the new acquired business in past to the margin and frankly speaking, I think for the new acquired business for example like Shunshun, firstly, actually Shunshun I can't see acquired because we are only the majority shareholder and for them what we need to care in the first place is rather they are generating a very good revenue growth rate and rather they are fast growing, growing faster than me. So we are happy to see that first it is growing faster than me and Shunshun is even…

Okay, got it. Got it. A very quick follow up on this, is how big is the revenue contribution from Leap English and how is the margin coming to margin level?

For the Firstleap, the whole year margins is around 5% of my total revenue and Q1 actually is performing better than that, its around 7% and they are breakeven now in Q1.

Okay. Got it. So what's your expectation on Shunshun in the second half?

Shunshun in the second half, I think in revenue perspective, don't expect there much about it, its very minimal because the revenue they can recognize this year is actually few state they see last year, but the only open the company last year starting from June. So for the second half, I think the center of revenue coming from Shunshun should be very minimal. You'll even don’t need to think about it and they will be breakeven, I think by the end of this calendar year.

Okay. Got it, thank you. This is really helpful.

Thank you.

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

Hi Luo and Mei. One question regarding the expansion, so on the one hand the expansion seems to bring you tremendous cost and growth enrollment, that we are actually seeing in many other companies, and the rapid expansion also you know, bring some trouble, such as the management capacity. So if the management capacity doesn’t really took hold of the expansion - expansion to actually fall apart. And so I wonder what's the management thoughts on the management capacity and actually any some, why is - what I think to those series of teachers in all this expanded or nearly entered this newly opened centers and where do you get those to masters, to manage, to operate the schools and how many cities actually see you stay into your - your capacity expand to cover and there are so many students in China, if you can't cover all of the China and how do you actually provide the services to the meetings of peers in the places that you cannot have your presence. So that’s my question, thank you.

Thank you, Tian. I think for the network development pace, I think - I know the company you just mentioned as benchmark, what I can say is actually we are of a model different from them, we are a central teaching model and we have quite centralized things and well standardized. So we have a little bit leverage coming from there. Our key subject actually is also Maths and Science which is more standardized than English. And so compared to them, we have a lot of things we are quite different. In the second place, yes, the more expansion will lead to more students and more teachers and will create more pressures on management. And - but what I can say is actually you can see when we try to expand more class rooms, actually most of them coming from their cities or the centers we have already there. So we try to make learning centers bigger and bigger, instead of going to too many new cities. So when you're running one many centers in one city for low time, sometimes you're adding more class rooms, it doesn’t mean the management capacity is much bigger than before because actually there are still one many centers. A good example is we have dozens [ph] learning of new centers in Beijing, previously so maybe 20, 30 class rooms and now it's more than 100 classrooms, while the management capacity actually is much lower than we opened five learning centers of more than 20 class rooms. So that’s kind of philosophy we have to stay. Of course it will also provide some kind of capacities, especially you have more teachers, more students and you're taking care of. But so what we are doing today is actually we are - continue our purchase in…

Thank you so much.

Thank you, Tian.

The next question comes from the line of Fan Liu from Goldman Sachs. Please ask your questions.

Congratulation on a strong quarter. This is Jason, on behalf of Fan Liu. May I ask what the current utilization rate and also what the rate we can expect for FY '17, especially on the back half of the fast capacity expansion rate? Thank you.

Yes, and the capacity fulfillment rates for us is a little bit different from our counterparts because we only evaluate the times loss we can use to teaches, students. For example in [indiscernible] more students they are Engler school, day time from Monday and Friday so, we don’t call them into our base and we only call there is a loss we can provide, we can. So by in summer and fall because in the summer and winter because there is vacation, so actually we can't have a lot of classes from Monday to Sunday. So, the capacity utilizations will be very different. What I can say, so why is the [indiscernible] you care more about the increase in that numbers, I think Q1 the overall capacities as this increase around 5%, in the long – I think in the whole fiscal year 2017 we will still maintain a healthy level of low single digit growth rate increase.

Thank you.

Thank you.

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