We are downgrading ATA Inc. (ATAI) and China Distance Education (DL) to Hold based on valuation and reiterate our Buy rating on ChinaCast Education (CAST).

Since initiating on ATAI with a Buy rating on March 27, the stock has jumped 135% to $9.41 from $4.00 and now trades at a CY:10 PE multiple of 28.1X, up from a multiple of 13.6X when we initiated. We believe that appropriate valuation for the company is 20-25X CY:10 EPS plus net cash, implying a valuation of approximately $8-$10 per share.

Over that same time period, China Distance Education has appreciated approximately 10% to $6.50 from $5.94, while seeing its CY:10 PE multiple rise to 25.3X from 14.6X at the time of our initiation. We believe a multiple of 20X CY:10 plus net cash is justified for a stock with an expected EPS CAGR of 35%+ over the next several years, implying a valuation of $7 per share.