IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

Arun has over 15 years’ experience covering the Technology sector. During this time, he has worked with technology start-ups and as an equity analyst in investment banks and independent research firms. He was formerly a Technology Analyst for Canaccord Genuity, Altium Securities, Espirito Santo Investment Bank, Noble Group and Clear Capital. He has a dual Master’s degree in Financial Engineering and Industrial and Operations Engineering from the University of Michigan. He obtained his Bachelor’s degree in Mechanical Engineering from the Indian Institute of Technology, Bombay. He is also a CFA charterholder.

IPOs and Catalysts/Events

Sunlands Education Pre-IPO Review - Explosive Growth Potentially at the Expense of Reputation

Sunlands IPO Valuation: Strong Cash Flows at a Modest Valuation

Sunlands Education IPO Review - Too Little Info on the Source of Its Growth Driver

China Education Group IPO Preview: The Maths Behind the IPO Pricing Doesn't Stack Up

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.

China Distance Education Holdings Ltd (ADR) (DL US)

China Distance Education Holdings Ltd (ADR)

Sunlands Online Ed IPO Preview: Winning Grades