Morgan Stanley maintains future equity overweight rating

The following is a summary of the contents of the report:

Performance exceeding expectations: Good future 2014 fiscal year the third quarter was strong, mainly thanks to the strong growth in enrollment and excellent cost control. The third quarter, the good future net revenue of 73.5 million U.S. dollars, an increase of 50%, compared with the company's guidance expected ceiling of 4% higher than our expected 5%. Diluted earnings per share of 0.15 U.S. dollars, an increase of 110%, higher than Wall Street expected 0.08 dollars. Based on non-US GAAP, the earnings per share is $0.18 trillion, up from Wall Street's expected $0.11 trillion.

Revenue growth was strong: Total enrollment grew 46% per cent year-on-year, compared with a 25% per cent rise in the previous quarter, mainly thanks to strong demand for small-class businesses. Cities outside Beijing and Shanghai remained strong, contributing 40% per cent of total small-class revenues, compared with 35% in the previous quarter, and 22% in the same period a year earlier. As for the Shanghai and Beijing operations, the former remains stable, and the latter has shown signs of rebounding. But the average sales price (ASP) rose from 9% in the previous quarter to 3%.

Profit margins are better than expected: Operating margins are up 10% to 16% year-on-year in the third quarter, thanks to excellent cost-control and operational leverage. In the first 9 months of fiscal 2014, operating margins were 19%, up 350 basis points.

The quarterly results are expected: a good future is expected to grow 42% to 46% year-on-year in the fourth quarter, higher than we expected 40%. In the third quarter, a good future deferred revenue of 173 million U.S. dollars, an increase of 61%, compared to the previous quarter year-on-year growth of 39%.

Valuation: We continue to maintain a "overweight" rating for future stocks.