17 Education & Technology Group Inc

17 Education & Technology Group Inc (NASDAQ: YQ) is an education technology entity that provides online tutoring services, assessment products, and data-driven teaching to students, teachers, and parents.

Investment Rationale – SPECULATIVE BUY at USD 4.42

• In April 2021, YQ obtained three patents pertinent to computer vision technologies and entered into strategic partnerships with PEP Digital Publishing Corporation and China Media Group’s Shanghai Bureau to develop educational resources.
• The Chinese public education has tremendous growth opportunities with supportive government policy for promotion education modernization.
• There is substantial scope for in-school operations to grow in the coming years as the Company has continued to invest in strengthening its products, school coverage, content and services.
• From a technical standpoint, 14-day RSI (33.72) is favourable to support the upside potential since it is hovering at an oversold position.
• The Company has a better current ratio than the industry median. In FY20, the current ratio of the industry was 1.73x, while the Company reported 2.53x.

Risk Assessments

• The stock price has plunged over 58% in the past six months, reflecting a considerable underperformance against the benchmark index.
• The Company is operating in a highly competitive market, which requires continuous investment in product differentiation and new customer acquisition through promotions.
• Higher operational cost due to increased salaries, enhanced marketing efforts, and challenging trading environment can aggravate full-year losses.

Financial Highlights for the quarter ended 31 March 2021 (as on 24 May 2021)

 (Source: Company Website)

• YO reported solid top-line growth of 107% in Q1 FY21 against Q1 FY20, which surpassed even high-end expectations.
• The revenue growth was supported by the solid performance in online K-12 tutoring services and Paid course enrolments.
• In Q1 FY21, the gross margin was 60.4% against 64.1% in Q1 FY20, reflecting a decent operational efficiency.
• The net losses increased RMB659.7 million in Q1 FY21 (Q1 FY20: net loss of RMB224.2 million), driven by higher operating expenses.

One Year Share Price Chart    

 (Data Source: REFINITIV, Research done by Kalkine Group)

*Closing price for 24 May 2021 was USD 4.42.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

YQ carried the decent trading momentum with strong paid course enrolments and robust MAU of in-school application. Following the strong top-line growth in Q1 FY21, YQ expects to report 135.8% to 143.2% year-on-year revenue growth in Q2 FY21. Moreover, the Chinese education system is likely to present ample growth opportunities with the long-term trend of informatization. Also, the Company has significant operational leverage to sustain robust top-line growth. The stock made a 52 week High and Low of USD 23.93 and USD 4.21, respectively. On the technical chart, the next important support level is at USD 3.76.

Based on the stellar revenue growth, promising growth prospects within the Chinese education system and favourable valuation methodology, we have given a “SPECULATIVE BUY” stance on 17 Education & Technology Group Inc at the closing price of USD 4.42 (as on 24 May 2021), with a lower double-digit upside potential based 0.27x EV/Sales (approx.) on FY21E Sales (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.