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 – SELL at USD 1.32

• The new PRC (People’s Republic of China) regulations can concern after-school tutoring services for subjects taught in compulsory education system.
• As of 31 March 2021, YQ reported an accumulated deficit of RMB9.3 million, after reporting 124.2% of Adjusted net loss (non-GAAP) as a percentage of net revenues in Q1 FY21.
• From a technical standpoint, YQ’s stock is sustaining below the 20-day EMA (USD 2.50), indicating a bearish price momentum.
• Over the past three years, YQ has shown negative profitability margins, showing significant underperformance against the industry median.

Risk Assessments

• The stock price has plunged over 87% in the last year, 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 costs due to increased salaries, enhanced marketing efforts, and a 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)

• YQ 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)

Conclusion

Although YQ stated that it has not received any official notification from PRC regulators, the new set of rules for after-school tutoring service can adversely impact the Company’s operations and prospect. The prohibition on academic institutions for providing tutoring services on compulsory subjects can worsen the Company’s losses. The stock has already shown a significant downtrend and it can face significant liquidity crunch to sustain the business. Therefore, it is prudent to jump off a sinking ship. The stock made a 52 week High and Low of USD 23.93 and USD 1.02, respectively.

Based on the worries over new PRC regulations, bearish price momentum, gloomy outlook, and lossmaking history, we have given a “SELL” stance on 17 Education & Technology Group Inc at the current price of USD 1.32 (as on 27 July 2021, 10:41 AM ET), while we look forward to reviewing how the Company comply with new rules and regulations for creating value for its shareholders.

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