Mei Li - Investor Relations Manager Rong Luo - Chief Financial Officer.

Claire Cao - Morgan Stanley Zoe Zhao - Credit Suisse Natalie Wu - CICC Alvin Jiang - Deutsche Bank Tian Hou - T.H. Capital.

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 Chengdu, Wuhan, Suzhou, Chongqing, Shenyang, Jinan, Shijiazhuang, Changsha and Qingdao.

Another highlight for the quarter is the ongoing growth momentum in Beijing, we continue to see a robust recovery in Beijing in all subjects, following our targeted summer promotions last year, we see an over 35% year-on-year enrollment growth in the first quarter in Beijing, a significant improvement from the flattish growth rate in the same year ago period.

With the strengthened management team and a better operational efficiencies we have set the stage for further growth. In the meantime, Beijing summer enrollments accelerated not only in the grades for which we offer the promotion, but also across all grades and studies. We expect continue strong growth momentums in Beijing in the coming quarters.

Let me offer a few more details about our targeted summer promotions in Beijing this year. We will offer the promotions first specifically for the first year of both junior high, and senior high students to grow the new enrolments, and increase the retention of among new students.

This is the first time we have promotional offers for the first year of senior high students and we are very excited that the enrollments for the senior high – for the first grade senior students has now more than doubled.

Also, this is the second year in a way to offer discounts for the first year of junior high students and further fueling on our success of last year campaigns, enrollments in the first year of junior high students once again grew very strongly, even of last years elevating enrollment base for this class.

Other grades, other than the ones for way to have special offers are also growing faster than before. This means first of all, the last years promotions has grown effectively with lasting results and secondly it reflects how we are able to recoup a broader range of students through our wider curriculum offers.

We expect that once again this leading offers this year we are ahead as to gaining more market share and promoting marketing consolidations in the coming quarters. In terms of enrollments by subject in the whole country, we are also very pleased to see continue strong growth in enrollments for Chinese and English.

As you know, enrollment growth in English in summer term is faster than other subjects year-on-year. Turning briefly to our one-on-one business. One-on-one contributed 13%, 1-3, of our revenue in Q1, compared to 18% in the same year-ago period.

We opened three new one-on-one new centers in the quarter, one in Xi`an and two Chengdu supporting business for a small class. We will continue to maintain a healthy growth of the one-on-one business. Let me now turn to our online course segment which recorded 50% year-on-year revenue growth in renminbi terms.

Online courses xueersi.com contributed to 4% of total revenue this quarter, flat with the year ago period. Online enrolments were 20% of the total enrolments, same as the year year-ago period. In the first quarter, xueersi.com has been transforming from an online platform of pre-recorded content to a live broadcasting.

For revenue from pre-recorded content with recognized revenue evenly over the subscription period. For the revenue from the online live class, revenue are recognized for approximately as the tutoring sessions are delivered.

As most live classes start from the second quarter, the tuition classes was almost off recorded in deferred revenue in the first quarter and will be recognized as revenue from the second quarter. Now I would like to update you on our capacity expansion.

In the quarter our Peiyou small class business entered Hefei city where we already have one learning centers for Firstleap's small class. Last quarter I mentioned we expected to add between 20 to 35 new small class in these centers.

In the quarter we added 27 new centers for Peiyou small class and which is 768 class rooms, 7-6-8, in cities with strong demand and high capacity utilization rates, such as Chengdu, Shanghai, Guangzhou, Beijing, Shenzhen, Chongqing, Shenyang and Hangzhou. We're close fallen in all centers in Beijing and Guangzhou.

These class room capacity increased represents a 50%, 5-0, year-on-year growth rates. In addition, we opened three one-on-one learning centers and six centers for Firstleap making a net of – net total of 20 to 32 new learning centers.

By the end of the first quarter, we have total 395 learning centers of which 269 are Peiyou small class, 47 are Firstleap small class, and 79 are one-on-one. We expect the class room capacity worth added to contribute to our growth this year.

In fiscal year 2017, our expectation plan for the fiscal year is similar to that of last years, you may recall that in fiscal year 2016 we added 51% class room capacity for small class versus the previous year, through a combination of new centers and the expansion of existing centers.

We will maintain a similar expansion pace this year to balance the teacher training process and a growing demand from the parents and the students. Particularly we plan to add between 20 and 30 class room – class learning centers based on the market demand in the second quarter.

As I already mentioned last quarter, in addition to our fast pace of learning center network expansion, we will start to hire more teachers and teacher assistance from the first quarter.

We need more teaching staff not only for our fiscal network expansion, but also for our new Hybean and online learning models and learning prevalence For Xueersi online courses, we have finished the early stage of building the online platform improving together the IT and product teams to run platforms.

Xueersi.com has been transforming from an online platform of pre-recording to content to live broadcasting, before we could roll our live online classes in the summer term, we have hire the teachers and teaching assistance, at the same time we have strengthen our training programs for new teachers to maintain high quality that our students has tend to expect from Peiyou.

Finally, we have hired more teachers and assistance to ensure we have assured teaching capacity in pace for our summer term, taken all together, this additional spending on the personal ahead of the summer term has put some temporary pressures to our margins.

We see these as important investment and mostly transitional cost that will translate into the long-term future growth.

Throughout the transition still under way, margins may see some shortened impact, but in the longer term, margin possibly impact should kick in, such as the higher ASP from the live class room compared to pre recording contents in the online school.

We believe that we will see improving margins over time with the ramp up of the online school enrollments in a strong growth for summer term. On another subject, I would like to update you on our overseas study initiatives. We are building an important new period for the company.

TAL Management has for a long time being passionate about oversea studies, transforming our brand into a global education brand to long-term key strategy goal.

In the past months, we have acquired a majority stake in Shunshun, a leading oversea consulting company in China and following our minority investment in 2015, Shunshun offers professional consulting services to students who desire to study abroad with online to offline platform.

We expect to consolidate that company in the second half of this calendar year. Shunshun's revenue is growing at a very exciting pace and we expect that coming to breakeven by the end of the year. Shunshun is the latest addition to our wide portfolio of international offerings.

We organically build a small class, like our English business, that specialized in either – such tutor in English.

Last year we acquired Firstleap which offers all study tutoring services in English to its students aged 2 to 15 and another very good brand is Lewaijiao provides the one-on-one English tutoring services from the foreign teachers who have the teachers from the Europe, United States and also coming from Southeast Asia.

In addition, we have made a number of small deals in the past. We expect that Shunshun together with all of its efforts we have together and we strengthen our presence in the international education studies market. I think we faced tremendous opportunity to become a leading players in the overseas study market.

First of all, through our China, the rapid growing numbers of parents and students are asking for this services/ Secondly, as the number one players in this area is diminishing, the market has become more and more fragmented.

And thirdly, new business model for education in clean online teaching which we are actively developing must be able to operate in larger markets in order to be successful. Before I move to the financial review, I would like to touch on our investments philosophy.

As you know, in the past year we had invested by fewer, but larger growth opportunities that were highly complementary to our own business model. We will continue to do so. On June 30 we signed a three US$400 million in revolving facility agreement.

The facility consist of US$225 million three year fully, multi rated term loan and US$175 million three year revolving credit facility.

We have no potential deals lie on in the short term, but for the longer term, we continue to look for targets in our core HR segment and the best time to do this - and look for the best time to do the potential share buyback program or pay dividend.

Our investment focus will be geared towards driving a transformation for our business into a global education brand which is our key long-term strategy goal. In the coming quarters, we expect our business momentum to continue giving us a strong and positive outlook.

We plan to maintain a healthy pace of demand driven learning centers network expansion in fiscal 2017. We will continue to invest in new initiatives, including double teacher future model and online live class and further ones are the global brand building.

Let me now review our financial performance in the first quarter, after that I will provide some further analysis and our business outlook for the second quarter.

In the first fiscal quarter, small class ASP in renminbi terms increased by 5% year-over-year due to the rise in prices in the selected cities, including Beijing, Guangzhou and Shenzhen and this will be even better in Q2.

One-on-one ASP in renminbi terms was flat, we expect small group class within our one-on-one business to continue to gain popularity in the future and lower the ASP of the overall one-on-one business through, even though we have increased the price of one-on-one class in some selective cities.

Online course ASP was down by 4% in renminbi terms in the first quarter, partially resulting from initial transformation into the live class models. Most live class will start from the second quarter and we will recognize revenue as we deliver that.

And cost of revenue increased by 64.8% to US$105.5 million from US$61 million in the same year ago quarter. The increase in cost of revenues was mainly due to - in the first pace, an increase in the teacher compensation and rental cost and secondly it’s a new business acquisition of Firstleap.

Non-GAAP cost of revenues, which excluded a share-based compensation expenses, increased by 64.8% to US$100.5 million, up from US$61 million in the first quarter of fiscal year 2016. In the first quarter gross profit was US94.6 million, as compared to US68.4 million for the same year ago period.

Gross margin for the first quarter was $48.5 million, as compared to $52.9 million for the same period of last year, due to the accelerated capacity expansion and the teacher recruitment for the coming summer term. Operating income was US$17.6 million, non-operating income increased 5.3% year-over-year to US$26 million.

Basic and diluted net income per ADS were both US$0.16 for the quarter. Non-GAAP basic and diluted net income per ADS, which excluded share-based compensation expenses were US$0.27 and US$0.25, respectively.

From the balance sheet, as of May 31, 2016, we had US$684.6 million of cash and cash equivalents and US$3.2 million of term deposits, compared to US$434 million of cash and cash equivalent and US$17.3 million of term deposits as of February 29, 2016.

Capital expenditures for the first quarter was US$12.7 million, representing an increase of US$6.4 million from US$6.3 million from the same year ago period.

The increase was mainly due to leasehold improvements and the purchase of servers, computers, software systems and other hardware for the company's teaching facilities and mobile network research and development.

As of May 31, 2016, our deferred revenue balance was US$558.7 million, as compared to US$331.3 million as of May 31, 2015, representing a year-over-year increase of 68.7%. Let me now turn to our Q2 revenue guidance.

For the second quarter today, the impact of RMB depreciation against US dollars is estimate to be around 7%, taking this into consideration and assuming no change, based on our current estimates, total net revenue for the second quarter for fiscal year 2017 is expected to be between US$247.9 million and US$251.3 million, representing an increase of 43% to 45% on a year-over-year basis.

In renminbi terms the projected revenue growth rate is expected to be in the range of 50%, 5-0, to 52%, 5-2, for the second quarter of fiscal year 2017. These estimates reflect our current expectation, which is subject to change. That concludes my prepared remarks. Operator, we are now ready to take questions.

Operator?.

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 capacities in the cities, such as Beijing, Xi`an, Shenzhen, Nanjing, Shanghai, Hangzhou, Guangzhou and et cetera.

Of course, some of our new Hybean models, we will also plan to add more in the subway area of the big cities. For full year fiscal 2017, we plan to maintain a healthy pace of demand, base learning center capacity expansion, so at the same time, we will also will try to enter more new cities.

Last year we entered around five new cities and this quarter in Q1 we entered Hefei and we are confident to say we probably will enter more cities in the coming quarters, at least four the whole year. But of course I will give you more updates when we enter the places.

And if we recall the progress of all the new place we are adding we have entered in the past two years, actually we are seeing the ramp up of the new cities is even better or stronger than what we have seen in the past.

So we believe if we enter the new places they will contribute to my revenue and profit is much earlier than what we have in the past several years. In addition, when we talk about a lot of capacity spending class room, more importantly is we also hire a lot of teachers and teacher assistance which is corresponding to more class rooms.

And today, I think we have more teacher and teacher assistance not only for our transitional fiscal learning centers in the small class business, but also for our Xueersi online school and IP platform which is the live broadcasting platform. And in the past quarter we add few hundred teachers and assistance who are related to the online initiatives.

So far based on the numbers we have seen, we are very happy to share - we have seen very positive dynamic in the online live class in the summer term and we can foresee we will enjoy a much faster growth here for online revenue growth - our online sector in the second half of fiscal year.

And we are also happy to see when we can continue to improve our capacity fulfillment rates and we continue to improve retention rates all of this new capacities, new teachers we have added will contribute to our revenue growth in the coming quarters.

Again, in general, they take around two quarters to ramp, but we believe with the much stronger numbers in summer term we are happy to see - we probably can see some positive things a little bit earlier.

And especially above new network developments impacts on margin, what I can say is shortened, yes, they have some temporary impact because in general we need to train the teacher for two quarters. We need to two quarters to ramp up the new class rooms.

But when they go into a summer term and fore term and winter term, we are averaging to running more smoothly. We can see more and more margin leverage coming from there. So that’s our explanation for my network development, I hope I answered your questions..

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 are very happy to see you know as they are growing very fast.

In the passing time we will only assume Firstleap is around 5% of my business, but actually in Q1 they are around 6% to 7% of my business. They are growing faster than what I expected. And their breakeven size - they are breakeven in Q1. So we are very happy to see all of this new business making very good progress.

By margin perspective because they are breakeven compared to my normal margins in small class business, they have a little bit dilutive impact.

In certain things we - you may also have noticed or pay attention to the link – the promotions we are running in Beijing, this year we are running promotions for the first year students in the senior high and junior high and based on experience, we have seen in last year, temporary - I think they should be having several million impact in Q2, but going to closer in Q4 they will have - they will be very good profit contributors over there.

And in the fourth place, I also remind you there is around 2.6 million government subsidized last year Q2 and this year on to today, we don’t receive anything because the government subsidized you know they don’t have the fixed schedule, it purely depends on the department. So we don’t put them in the forecast.

And lastly, I also need to remind you guys, just last year we have around $50 million capital gains through a disposal of the Guangzhou to the Tianjin [ph] location, which is of the one off events. This year we probably - we don’t see any significant deals like that.

And so if we balanced all this pros and cons the positive things and the challenges, what I can say is in relation to that is the Q2 margins definitely will be better than Q1, by considering all options we have today, I think the net margin compared to last year should be slightly lower than the same year ago period. So that’s the situation for Q2.

And if we're looking forward to Q3 and Q4, again, it’s a little bit early to talk about that. But based on the preliminary registration numbers that people who enroll are a reflection, actually we see compared to the previous years is also performing much better. So we have enough reason to believe we should have some positive things in Q3 and Q4.

So that is my big picture for the margin that comes every quarter. So we are probably I think, I can share more color or guidance about the full year maybe in the next earning call.

And especially for the second question about the O2O model, O2O model, and again, thank you for a wise profound, very kind investors, they told me sometimes I talk about O2O model, they will think about Baidu. So I changed to the word to double teacher model, actually our company we call [indiscernible] which is the double teacher classroom.

So in this model I think they are showing early stage, we feel its good to go, but we still need to be patient to build more and more double teacher learning centers. In the first place we will build more learning centers in the subway area of the big cities, for example, like Beijing, Nanjing.

In the second pace, we think about to develop on purely new cities which is purely double-digit models which is supposed to happen in the coming quarters. So again, we don’t have kind of specific target, how many learning centers we need to build for their model. We are maintaining our quality requirements.

So we just based on what we can and the market demands to open more and more double teacher model, new learning center. Every quarter I opened that, I probably let you guys know. So that’s my answer, I wish it could be a little bit helpful..

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 to provide you apple-to-apple comparison because the business is ongoing.

The key drivers for their margin pressure is coming from we have very high kind of - we have a little bit high development in the new learning centers and new classrooms. So we are 50% in Q1 and very similar to Q2 and we also need to balance our investment in teachers.

But if we take all of this kind of and make sure things all, we just compare my mainstream business, small class payers, small class actually I think in the coming quarters we are still – we are still catching some margin leverage from there. But as a whole company we need to consider in different investment there.

For example our online initiative we are investing in the pros, starting from last quarter and this quarter, we can see that they are more and more - they have started generate more and more revenues. Their growth rate is much faster and we believe that could probably can be a very important contributor not only in revenue but also in profit.

For example in the Hybean model, their future models and in the live online models, one feature actually they can teach a lot of students.

So which is a very important space, we could some leverage from there because off learning centers around 20% of the revenue actually started to compensations and one teacher, they can only teach one class at the time.

So what they need to do is kind of try to be patient, control averaging in a fair range, we manage and then feel comfortable, and try to deliver the sustainable and reliable growth in the coming years. And the third answer to retention rate of this promotions and you also asked some details about promotions.

I said, I could combine them together is, the promotions actually were run today mostly in Beijing. I know my counterpart has to run very aggressive promotions across the country in more than 30 cities something like that. We don’t want to follow that and where we have no excuse to follow that.

Beijing is competitive market, I think that’s the right way because it is a little bit mature, so that’s the right way for us to leverage that offer. So we try to consolidate more market share.

Actually we are now gaining market share from New Oriental and New Oriental is now gaining more market share for me, actually we are gaining more students and shows from small and medium companies in this market. And for other cities today, first place the market is still fast growing, the penetration of the city is much lower than Beijing.

In the second place is we don’t have the similar level of fierce competition in Beijing. All of our schools in the other cities they are doing quite well, we have to see where it has numbers in the capacity utilization rates, retention rates, refund rates. So we don’t have enough space to run promotion like that.

And so for us, what we need to do is, we want to leverage this kind of link offers to penetrate some of the wide space market and customers we don’t penetrate before. For example I showed some case in Beijing, in the past you know we you don’t have many students coming from the sub area.

But now we've seen some kind of offerings and we are building more and more double-digit models in the sub area of Beijing. We have placed some things together, we have seen, we are making good progress over there.

So we still have long potential to go even in Beijing city and we believe all kind of these – the promotions now single that is not alone, actually its one of the ramp ups or tools we can leverage, but it doesn’t mean these two are ramp up and can be used everywhere.

So we will balance all the demands and capacity and reality of the market to consider what kind of tools we need to use. And again based on experience last year actually we are - we have a very good retention compared to ourselves, and this year because we even had made some changes and new designs in the promotions.

So we have good reasons to believe the retention rate for this year will be even better than last year. So that’s general station of all the promotion..

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 much more faster because they are still the second year company. And second reasons we also need to taking care of their profitability is improving.

Last year the Firstleap is last making acquisition by more than 15%, but this year it is breaking even already and we have enough reason to believe in the coming two to three years there could be – reach a level of 10% to 20% operating margins.

For Shunshun, frankly speaking you know that is because for the oversea consolidated companies they have some time delay to recognize the revenue because they need to wait for students to offer and go abroad.

So if we - so we can foresee where we have much stronger revenue contributions and profit contribution for Shunshun starting from the second half of this fiscal year and even more to come - even more should come into our P&L next year because they meet around 10 months to 12 months delay.

So these two companies are very good targets and they are in the first place you know, what they have, they have already high very good target and very complementary to my K-12, in the second place, [indiscernible] were doing quite well and over the momentum in personal revenue and profitability is also fast changing and right after our acquisitions, our investment there we have seen with more and more synergies in Beijing there.

For example our Firstleap now were in more and more places we will set out new learning centers together and for Shunshun we have - we have established a channel to send more students to them - to them to consult for their overseas studies.

So all of that is right in the place, what we need to do is give them some time and they will provide us some good results, much better than what we expected. So that’s our observation of the new acquired business, in short term they should sound temporary precious, but we believe this will become very positive in the coming years..

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 the past, so we strongly believe technology and their platform, we strongly believe the very important role of the data and technologies here, that’s why in the past we invest in the ICS 2.0, 3.0 and starting from VServer, invest in IPS.

And we also try to - try to develop more online offers, not only from xueersi.com, but also Hybean's and other platforms to try to reduce the capacity of the whole teaching. We wish more and more staffs can be centralized and standardized in the IT platform.

So in short, as we tend to invest more in our IT, technology and data and to drive to the much bigger size in business in future. And about your questions, how many places I can penetrate and what should I do for the place I don’t have presence. Again, I think the fiscal network, the learning center base model, they have their limits.

In our assumption is we only will target around 40 cities in a whole country compared to my counterpart New Oriental have more than 50 cities, [indiscernible] has more than 80 cities and some other companies like [indiscernible] even have more than 100 cities something like that. We only target around 40 cities in offline learning center networks.

But for the rest, what should we do, we have two options.

The first one is that application model, we have mentioned to you guys last quarter even its in still in a while early stage, we believe its a very good offering today and thanks to the [indiscernible] to leverage the best teachers in the big cities and can provide a high quality tuition services to the students in [indiscernible] cities.

And the Xueersi online school, Hybean platform is also we try and we are the first company in the industry to try the live broadcast in models since three years ago. Based on where it is today and based on a numbers [indiscernible] summer term today we are happy to see this is a right way to go.

And we believe this is by strategy to try to penetrate and try to cover more students all over the country. But again Chinese is too huge, you always leverage all of this methodologies and new models we can now cover all of them. By way as a company even 10% of market or even 15% of market is very big enough for us to develop already.

So, what we need to do is control these area to grow too fast, control the desire to want to be successful may be Illinois [ph] and just follow our current pace and just as continue to focus on the quality of the teaching services, continue to care more students, continue to invest and leverage the IT and the technology and the platforms to standardized and centralized the model which is the right direction for us to go..

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..