There will be a landing on the New York Stock Exchange this Friday (October 25) with an issue price range of $15-18.
Editor’s note: This article is from Huasheng Securities, is authorized to publish .
Quick View of Prospectus
Source: wind, Huasheng Securities
core perspective
The success of the early vocabulary dictionary has laid a lot of user base for a good way, established a strong brand, and supported the great advantage of learning to gain customers.
Thanks to the development of technology and the recognition of users, the scale of China’s intelligent learning market has been growing rapidly, and the compound annual growth rate from 2018 to 2023 is expected to reach 47.4%.
The company’s revenue has grown rapidly, but marketing costs are high and losses are expanding.
I. Company Profile: Transforming from a Dictionary to a Leading Intelligent Learning Company in China
Founded in 2006,
is a leading intelligent learning company in China that specializes in learning products and services and is part of Netease, China’s leading Internet technology company.
The success of the early vocabulary dictionary has laid a lot of user base and established a strong brand. On this basis, we have expanded our range of products and services to meet the lifelong learning needs of pre-school, primary and secondary schools, college students and adults. As of the first half of 2019, NetEase’s MAU has more than 100 million MAU learning tools, which supports the great advantage of learning to acquire customers.
There is a well-established product matrix:
Online Learning Tools: A collection of dictionaries, translations, and writing tools driven by leading technology, such as a dictionary, a translator, and a cloud note.
Online Courses: There are online courses such as the Excellent Course, NetEase Cloud Classroom and Chinese University MOOC. Among them, there is a quality course as the flagship online course brand, which will focus on K-12 users. .
Intelligent hardware: There are learning smart hardware devices such as smart pens, vocabulary pens, tangible translation eggs and tangible pens, which can further improve the user experience and efficiency.
Content Interaction Class: Online interactive classes such as mathematics and vocabulary, allowing students to interact with teachers on mobile devices.
Source: Prospectus, Huasheng Securities
II. Industry Overview: The scale of smart learning market is growing rapidly
Thanks to the development of technology and the recognition of users, the scale of China’s intelligent learning market has been growing rapidly, reaching approximately RMB 103.4 billion in 2018, and is expected to be 47.4% composite between 2018 and 2023. The annual growth rate has increased to RMB 719.8 billion in 2023.
Source: Prospectus, Huasheng Securities
In terms of market segments, China’s smart learning industry includes: AI-based online courses, intelligent knowledge products and services, and institutional learning solutions. The following chart shows the size and growth of these key market segments.
Source: Prospectus, Huasheng Securities
The AI-driven online course is an online course that uses AI technology for teaching, learning, practicing, or testing. The total revenue in this market segment is expected to grow at a compound annual growth rate of 72.2% from 2018 to 2023, with the online K12 after-school coaching market expected to be the fastest growing sector. Currently, by AThe I-driven online course market is still in the early stages of development, with leading companies occupying a significant share of the market.
Intelligent knowledge products and services provide online knowledge tools, online payment knowledge applications and smart devices. The average MAU value for this segment is approximately 585.3 million in 2018 and is expected to reach 783.3 million by 2023. Well-known participants have established a brand with a large user base. In addition to the subscription fees paid for products and services, companies often also generate revenue through advertising and marketing solutions.
Institutional learning solutions primarily include licensing technology and solutions to educational institutions. Driven by government policies, most market participants focus on providing on-campus intelligent learning solution services, such as automatic test scoring systems, digital test questions, etc., to reduce teachers’ repetitive work and improve teaching efficiency. There are many participants in providing such institutional learning solutions, so the market is highly fragmented.
Third, financial analysis: increase income does not increase profits, cash flow is not good
Like many companies in other educational circuits, there is no way to make a profit. In 2017, 2018 and the first half of 2019, the revenues were RMB 460 million, RMB 730 million and RMB 550 million respectively; net losses were RMB 164 million, RMB 209 million and RMB 168 million respectively.
Source: Prospectus, Huasheng Securities
The reason for the increase in revenue is not high. The main marketing rate is high. In the future, there is still a plan to continue to invest heavily in marketing and brand building. It is expected that this will continue to increase the company’s marketing expenses.
In addition, the company’s cash flow situation is also underperforming. The prospectus shows that the main sources of liquidity include Netease’s loans and the proceeds from the sale of good preferred stocks. In other words, the current financing channels are relatively simple and there are a large number of liabilities.
As of June 30, 2019, the company had a book cash of 52.17 million yuan, total assets of 639 million yuan, total liabilities of 1.416 billion yuan, an asset-liability ratio of 221.6%, and a shareholder equity of 1.26 billion yuan. . Among them, the outstanding interest-bearing short-term loans payable to NetEase Group was 878 million yuan, accounting for a large part of the company’s current liabilities.
Source: Prospectus, Huasheng Securities
The prospectus mentioned that the short-term loans of Netease Group are generally repaid within one year, and Netease Group has paid for it to provide working capital for its business operations. “Repayment of loans will have a material adverse effect on our liquidity, financial condition and cash flow.”
IV. Core competitiveness and risk points: Netease strongly supports and online education is fiercely competitive
In order to better realize the development of new business, NetEase has been constantly adjusting its organizational structure since 2018, including suspending or transferring NetEase photo album, Mint Live, Netease Insurance, etc., integrating the Department of Business and the Hangzhou Education Department. The education sector continues to focus resources.
But for Taoism, when faced with a huge loss of listing, it also faces online education giants such as New Oriental Online, Good Future, VIPKID and so on. In order to seize the market, companies have to increase their spending on marketing, which will put more pressure on their own cash flow situation and single financing channels.
V. Valuation comparison and purchase proposal
Based on the word-of-mouth and users accumulated in the early dictionary, and the support of Netease behind it, Netease’s development prospects are good. However, compared with the traditional two major educational giants in the country, New Oriental and a good future, it takes a long time to gain the trust of students and parents. And the current financial distress and lack of profitability also require investors to have more patience.
Source: wind, Huasheng Securities
Risk and Disclaimer: The above is only the personal position and opinion of the author. Investors should consider the risks of investing in products in light of their own circumstances before making any investment decisions. If necessary, please consult with a professional investment consultant. This article does not constitute any investment advice and does not make any commitment or guarantee.