GSX is a leading online K-12 after school tutoring service provider, focusing on high-GPM, livestream dual-teacher large class model. China’s online K-12 AST market is estimated to grow at 25.4% in 2020-25E, providing ample growth potential. GSX would rationalize ad spending, enhance customer satisfaction and increase retention rate to achieve more sustainable growth. Share price has been volatile recently due to policies and unwinding of hedge fund holdings. GSX trades at 4.5x FY21E P/S, below peers’ average of 6.2x and near the low-end of its P/S trading range.
- Rationalize ad spending to achieve sustainable growth. 4Q20 adj. net loss reduced QoQ from RMB864mn in 3Q20 to RMB554mn in 4Q20. OPM QoQ improved by 18.9ppt to -31.5% in 4Q20, led by 13% QoQ decrease of selling expenses. Operating cash flow returned to RMB636mn (vs RMB679mn outflow in 3Q20). After equity raising in Dec 2020, GSX had RMB7.7bn net cash in FY20 year-end. In 2020, online education sector sharply increased ad spending in 2020 as online education demand increased amid COVID-19 outbreak. News (source: qq.com) said the sector had raised RMB53.9bn in 2020 to replenish capital. GSX plans to reduce some ad spending in social media platforms (quite expensive and traffic overlapped) and explore new customer acquisition channels such as short-video, livestreaming platform, offline channels, etc.
- Enhance lesson quality to raise retention ratio. GSX lowered its student-to-tutor ratio from <300 in FY19 to <200 in FY20. Although this increased teachers’ costs, the reduced class size of after-class small group lesson improved customers’ satisfaction. Retention rate of primary grades courses increased in FY20. Higher retention ratio could save ad spending.
- Increase primary grades student mix to extend customer life-cycle. Primary grades student mix accounts for one-third of K-12 students. GSX targets to increase primarily student mix through better course quality. Coupled with increase in retention ratio, GSX could provide itself with more secondary grade students and could trim ad spending in future.
- Policies to come in 2021. MOE revealed it will release policies this year to further strengthen the regulation of K12 AST sector and reduce students’ workloads and burdens. We think the coming policies would accelerate sector consolidation and will be positive to leading sector players.
- FY21E outlook. GSX guided a 40-43% net revenue YoY growth in 1Q21E. The lowered growth (vs 137% in 4Q20) was mainly due to class scheduling impact from a later spring semester and a shorter winter break in 2021. Management expects growth rate to improve in 2H21E, supported by low base and adult courses, and targets 70-80% growth in FY21E. Key risks: (1) unwinding of hedge funds holdings, (2) policies.
