AsiaPacificEquityResearch17October2019ChinaEducationWhat'sBetterThanLearning?HeadofAsiaGaming,Lodging&LeisureDSKimAC(852)2800-8597ds.kim@jpmorgan.comBloombergJPMADSKIMJeremyAn(852)2800-8512jeremy.an@jpmorgan.comDerekChoi,CPA(852)2800-8744derek.c.choi@jpmorgan.comJ.P.MorganSecurities(AsiaPacific)LimitedSeepage110foranalystcertificationandimportantdisclosures,includingnon-USanalystdisclosures.J.P.Morgandoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.www.jpmorganmarkets.comWeassumecoverageoftheChinaeducationsector,dissectingtheindustryfromdifferentperspectivestoarriveatasingleconclusion:it’sstillhardnottolikethesector,particularlytheBigTwo,asweseetheir‘compounderstory’isstillat(very)earlyinnings.WeassumecoverageofEDUandTALandinitiatecoverageonGSXandKoolearn,withthepeckingorder:EDU>TAL>GSX>Koolearn.Rarecomboofhighgrowthandhighvisibility.Weseealottolikeabouttheafter-schooltutoring(AST)industryinChina.Demandisnon-cyclicalandstillunderpenetrated,suggestingaseculargrowthoutlook.Earningsarehighlyvisibleandstable,withmarginupsidepotential.Cash-flowprofileisstellar,printingcashreturnsthatare2-3xofcostofcapital.Admittedly,thestorymaybewell-known,butitdoesn’tmakeitanylesscompelling,inourview.Isthefutureofeducationonline?ToanswerthismostFAQ,wedeepdiveononlineAST,concludingthefollowing:(1)Uniteconomicsisveryfavorable,withlife-timevalueexceedingacquisitioncostsby2-3x;thisprovesaclearpathtoprofit,as‘profitabilityswitch’canbetoggledbyslowingstudentacquisition.(2)Keydifferentiatorsareteachingcontent(now)andtechnology/data(future),favoringbigplayerswhoarewillingtoinvest,vs.thosefocusingontrafficacquisitionorpresentprofit.(3)OnlineAST’sbigpotentialliesinmid/low-tiercitieswithseveredemand/resourcegapandless-affluenthouseholds,whileofflinewillcontinuetoservethose...
