COE China Online Education Group **
Sector financial performance:
This china-based company, who primarily provides interactive online English education platform for K-12 students mainly, has been grouped into online English education sector in education industry.
Sales of companies in this sector (China market) seem to grow very quickly between 2015 and 2017 (100-200% annually based on a typical company data) primarily due to fast increase in revenue from k-12 students. This fast growth seems to have been slowing down since 2017 as indicated by increasing spending on marketing and sales with less growth in revenue. The reason may be due to competition with demand that may have reached a temporary maximum.
Due to the fast increase in revenue, which mainly come from high margin services, gross margins were improved firstly (a typical gross margin was 63% in 2017). Therefore, helped by the decreased SG&A as percentage of sales due to the leverage of increased revenues, companies’ operating margin got improved as well (A typical operating margin among those companies has gone up to about -67% from -180% about three years ago). However, as a result of increasing competition and market’s getting mature since 2017, we have seen increasing spending on marketing and sales but slower revenue growth. And this caused improvement of loss and cash flow even more slowly in 2018.
According to our analysis, the current companies’ enterprise price/sales ratio is 1.2 with an interest/EBITDA ratio of 0%.
The fast increase (100-200% annually) in revenue of this company between 2015 and 2017 has been a result of increase in the number of active students (K-12 mainly), which seems to be consistent with what has been happening in other K-12 educational business. The growth has slowed down largely to about 28% annual growth in the recent quarter, the continuing increase in average spending per student indicates that the demand for this company’s service is strong and sustainable.
The first six months of fiscal 2018compared with same period of 2017(ended 20180630)
Revenue increased by about 47-65% (47% for 2Q) primarily due to the increase of 28-42% (28% for 2Q)in the number of active students and increase in average revenue per student.
Fiscal 2017 compared with 2016
Revenue increased by about 103% primarily due to the increase of 52% in the number of active students and increase in average revenue per student.
The first nine months of fiscal 2017compared with same period of 2016
Revenue increased by about 95% primarily due to the increase in the number of active students and increase in average revenue per student.
Fiscal 2016 compared with 2015
Revenue increased by about 170% primarily due to the increase of 89% in the number of active students and increase in average revenue per student.
Fiscal 2015 compared with 2014
Revenue increased by about 196% primarily due to the increase of 147% in the number of active students and increase in average revenue per student.
Its gross margin (including teacher fees and payment costs) went up by about 600 basis points to about 65% of 2016 since 2014 due to the shifting of services mix to higher margin, the raised price, and leveraging of expenses as a result of increased revenue. However, its gross margin went down to about 63% in 2017 as growth in revenue of high margin service slowed down. During the same time, its SG&A as percentage of sales has been largely improved probably as a result of leverage of fast increased revenue and thus caused its operating margin up to -67% of 2017 from -180% of 2014 (based on 12 months trailing data). Margin continued to be improved as sales growth. We see a gross margin of about 64% and operating margin of -46% in 2018. However, we did still not see any significantly positive change from cash flow loss probably low efficiency of marketing and sales.
This stock currently has a companies’ enterprise price/sale ratio of 1.2 (RMB60.5). We think that its stock is being relatively overvalued considering that fast increase in revenue based on massive service strategy may not be able to continue its previous pace under current costs and therefore, there are more uncertainties in predicting the timing for this company to make positive cash flow so that it can justify its price/sales ratio of 1.2.