IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Sunlands Technology Group / Equity Capital Markets

Sunlands Online Education Group filed for a US IPO to raise $300 million on 23 February. It is a Chinese online education provider backed by <a href="https://www.smartkarma.com/entities/531" target="_blank" data-smartkarma-citation="entities:531:1">New Oriental Education &amp; Tech Grp (Adr) (EDU US)</a>, an 8.5% shareholder.Sunlands is a leading player (5.1% market share) in the online STE tutoring market which is forecasted to grow at 58% CAGR from 2017 to 2022. Sunlands has superior growth, profitability and cash generation metrics vs online education peers. A key risk is Sunlands’ reliance on fuelling growth by offering students interest-free loans. Third-party loan providers take on the bad debt risk in exchange for principal repayments from the student and interest payments from Sunlands. On balance, we believe that the Sunlands’ IPO is attractive on a fundamental basis due to:<ol><li>A well-established brand and effective sales and marketing efforts have resulted in new student enrolments growth rapidly increasing from 5% in 2016 to 67% in 1H17. Due to tuition price increases, gross billings have been rising at a faster clip. Sunlands’ gross billings growth has risen from 66% in 2016 to a remarkable 188% in 1H17.</li><li>Sunlands is rapidly growing billings per new student while keeping a tight lid on student acquisition costs. Billings per new student grew 58% in 2016 and 73% in 1H17. In contrast, acquisition costs as a percentage of billings per new student as marginally declined from 31% in 2015 to 29% in 1H17.</li><li>We believe that cash EBITDA is a useful performance metric for subscription-based businesses which collect upfront payments. Cash EBITDA is adjusted EBITDA with billings replacing revenue and provides visibility on actual cash earned in the year. Sunlands’ cash EBITDA as a percentage of billings has materially increased from -1.7% in 2015 to 33.9% in 1H17.</li><li>Sunlands’ strong cash EBITDA has resulted in robust free cash flow (FCF) generation. Sunlands’ FCF as a percentage of billings has materially increased from -1.2% in 2015 to 28.8% in 1H17. Notably, the 1H17 performance was ahead of its online education peers.</li></ol>We will provide a view of valuation once the IPO price range is announced.

Sunlands Online Education Group filed for a US IPO to raise $300 million on 23 February. It is a Chinese online education provider backed by New Oriental Education &amp; Tech Grp (Adr) (EDU US), an 8.5% shareholder.Sunlands is a leading player (5.1% market share) in the online STE tutoring market which is forecasted to grow at 58% CAGR from 2017 to 2022. Sunlands has superior growth, profitability and cash generation metrics vs online education peers. A key risk is Sunlands’ reliance on fuelling growth by offering students interest-free loans. Third-party loan providers take on the bad debt risk in exchange for principal repayments from the student and interest payments from Sunlands. On balance, we believe that the Sunlands’ IPO is attractive on a fundamental basis due to:A well-established brand and effective sales and marketing efforts have resulted in new student enrolments growth rapidly increasing from 5% in 2016 to 67% in 1H17. Due to tuition price increases, gross billings have been rising at a faster clip. Sunlands’ gross billings growth has risen from 66% in 2016 to a remarkable 188% in 1H17.Sunlands is rapidly growing billings per new student while keeping a tight lid on student acquisition costs. Billings per new student grew 58% in 2016 and 73% in 1H17. In contrast, acquisition costs as a percentage of billings per new student as marginally declined from 31% in 2015 to 29% in 1H17.We believe that cash EBITDA is a useful performance metric for subscription-based businesses which collect upfront payments. Cash EBITDA is adjusted EBITDA with billings replacing revenue and provides visibility on actual cash earned in the year. Sunlands’ cash EBITDA as a percentage of billings has materially increased from -1.7% in 2015 to 33.9% in 1H17.Sunlands’ strong cash EBITDA has resulted in robust free cash flow (FCF) generation. Sunlands’ FCF as a percentage of billings has materially increased from -1.2% in 2015 to 28.8% in 1H17. Notably, the 1H17 performance was ahead of its online education peers.We will provide a view of valuation once the IPO price range is announced.

Sunlands Online Ed IPO Preview: Winning Grades

Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Equity Bottom-Up

China Distance Education Holdings Ltd (ADR) / Equity Bottom-Up

China Distance Education Holdings Ltd (ADR)

After relying mainly on forced consolidation for many years (with minimal worker redundancies), it appears state-owned enterprise (SOE) reform in China is finally turning towards more aggressive remedies in 2016. Authorities are bolstering the legal framework required to handle bankruptcies in a formal and relatively transparent manner; top officials have identified the sectors suffering the most from excess and / or outdated capacity; and bureaucrats have established detailed targets for capacity reductions and related job losses in those sectors. In addition, the central government has set timetables for achieving these targets, and, importantly, it has earmarked at least 100 bn RMB in funds (US$15 bn) to assist local governments in retraining and redeploying the millions of workers who will be displaced by SOE reforms. In this note we attempt to provide answers to the following questions:<ol><li>Is the apparent acceleration of SOE reforms and planned spending on job re-training and worker redeployment an attractive opportunity for private education providers in China?</li><li>If so, which companies are best positioned to take advantage of this trend?</li></ol>

After relying mainly on forced consolidation for many years (with minimal worker redundancies), it appears state-owned enterprise (SOE) reform in China is finally turning towards more aggressive remedies in 2016. Authorities are bolstering the legal framework required to handle bankruptcies in a formal and relatively transparent manner; top officials have identified the sectors suffering the most from excess and / or outdated capacity; and bureaucrats have established detailed targets for capacity reductions and related job losses in those sectors. In addition, the central government has set timetables for achieving these targets, and, importantly, it has earmarked at least 100 bn RMB in funds (US$15 bn) to assist local governments in retraining and redeploying the millions of workers who will be displaced by SOE reforms. In this note we attempt to provide answers to the following questions:Is the apparent acceleration of SOE reforms and planned spending on job re-training and worker redeployment an attractive opportunity for private education providers in China?If so, which companies are best positioned to take advantage of this trend?

Can Job Retraining Initiatives Linked to China's SOE Reform Boost Growth of Private Education Firms?

China

Tarena International, Inc. provides professional education services. The Company specializes in Information Technology (IT) professional education services including classroom training. Tarena International offers its services throughout China.

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Tarena International (TEDU US)

Sunlands Online Ed IPO Preview: Winning Grades

Sunlands Online Education Group filed for a US IPO to raise $300 million on 23 February. It is a Chinese online education provider backed by New...

Arun George

Can Job Retraining Initiatives Linked to China's SOE Reform Boost Growth of Private Education Firms?

After relying mainly on forced consolidation for many years (with minimal worker redundancies), it appears state-owned enterprise (SOE) reform in...

Daniel Hellberg

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