Reforms on the way
? EDU reported 1H FY5/22 revenue of US$1,967m, up by 5% yoy, and a non-GAAP net loss of US$787m, below our expectations, because of reform measures amid the “double reduction” policy in the K–9 education segment.
? EDU will explore opportunities in the education sector, while Koolearn (1797 HK) will explore more business opportunities in the e-commerce sector. We expect EDU to continue to report a net loss in 2H FY5/22F but to be close to breakeven in FY5/23F.
? Downgrade to Hold with a new DCF-based TP of HK$12.6. We believe the risks related to “double reduction” have been largely released, but EDU still needs time to find a more efficient way to turn around its business.
Impacted by the “double reduction” policy
EDU ended its K–9 after-school tutoring business on Jan 1, 2022. While it is still providing high school after school tutoring services, management said it will closely watch specific policies of local governments for this segment. Before the “double reduction” policy, its K– 9 business accounted for 55–60% of EDU’s total revenue and the high school segment accounted for 20%. The gross margin for the period was 42.4%, dropping by 8.6% pts yoy. The selling and marketing expenses ratio and admin expenses ratio rose 13.4% pts and 31.3% pts, respectively, because of the reform measures amid the “double reduction” policy, so EDU recorded an non-GAAP net loss of US$787m in 1H FY5/22, below our expectation. Leveraging its advantages of reputable brand recognition, strong management, and an adequate cash position (US$4.8bn cash on hand at the end of 1H FY5/22), EDU is actively seeking reform opportunities in the education sector.
EDU reform measures
In EDU’s 1H FY5/22 results, it recorded the one-time loss for closing half to two-thirds of its learning centers and cutting over half of its staff nationwide. Thereafter, learning center closings and staff cuts will be limited to local areas. EDU’s high-school subject tutoring business was terminated in some provinces/cities. Currently, there is no unified standard from the national government regarding tutoring for high-school subjects, but EDU will comply closely with all local policies. Currently, one of EDU’s major focuses for reform measure is to actively develop its adult education business, including overseas test prep, postgraduate entrance exam prep, and English certificate exam prep, which were its core business when EDU was established in 1993. Meanwhile, EDU will continue to explore non-subject training opportunities, such as art, sports and STEAM courses, tutoring, and overseas study tour business.
Koolearn reform measures
All of Koolearn’s K–12 online education business ended. The outlook for its adult business remains unchanged, delivering 5-10% yoy growth. Currently, Koolearn’s major reform focus is live-broadcasting e-commerce, using its own live-broadcasting system and tutors as live-broadcasting hosts. EDU founder Mr. Yu Min Hong is the largest KOL for Koolearn’s live-broadcasting business. Major product categories of this business include agricultural products, liquor, dairy, food, snacks and other hot consumer products. Koolearn will establish its own supply chain for the business and make good use of its over 100k members. Another focus of Koolearn will be smart hardware, such as scan pens, which help English learning, and other learning instruments. Koolearn will also provide online education support for EDU’s “to B” business, such as providing after-school tutoring services for public schools and supporting vocational education. EDU and Koolearn are preparing to publish reputable teaching materials they developed based on their almost 30 years of teaching experience.