Strategy Note /
China

Will GSX shares rally with the re-emergence of Covid-19?

  • Re-emergence of Covid-19 to boost investors' trust in online education companies.

  • GSX Techedu imitated the double-teacher model, which TAL & New Oriental applied into their teaching methods long ago

  • Firm shorted at least 12 times and is under internal investigation. Delisting would be inevitable if found guilty

Will GSX shares rally with the re-emergence of Covid-19?
Qasim Khan
EqualOcean
16 April 2021
Published by

To read the full article for free, please click here.

Although GSX share price keeps climbing – in part because of the re-emergence of COVID-19 in China – the company lacks investment potential for many reasons.

Founded in 2014, GSX Techedu raised millions of dollars in an angel round from QF Capital. Before it went public in June 2019, the company also raised USD 50 million in a Series A funding from Gaorong Capital, QF Capital, GP Capital and more in 2015. 

The firm is an online K-12 education service provider in China.

According to the prospectus submitted to the US Stock Exchange Commission, GSX stands out as an unconventional e-learning company with a fast-growing addressable market, scaling net revenue, and positive operating income.

Re-emergence of Covid-19 and the ever-growing K-12 market

Similar to the beginning of 2020, the recent re-emergence of COVID-19 has boosted GSX’s stock price once again. New COVID-19 cases are leading to situational lockdowns in some tier-1 cities such as Beijing and Shanghai. 

K-12 online education is a new type of learning and teaching method, which integrates with the Internet and the latest information technologies. China’s K-12 online education industry has developed rapidly in recent years due to strong support from the government and favorable policies. According to Chyzxx.com, the market size of K-12 online education in China was approximately CNY 64.88 billion (link in Chinese) in 2019, with a year-on-year increase of 46.4%. The growth rate remains double-digit. 

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GSX’s competitive advantage

Similar to other online education companies, GSX listed focuses on its "high teaching quality."

GSX stands out among its competitors because the firm has very strict standards in its recruiting process. Specifically, its instructors must satisfy the requirements such as having a postsecondary degree in education from a top-tier university. Moreover, the candidates should have extensive teaching experience in the education sector.

According to reports published on the firm's website, the interview process is very selective as only less than 5% of candidates can be employed as an instructor. This process ensures that only the best education professionals can join the company.

As per the company’s prospectus, it has established a three-sided teaching system: lecturer, tutor and AI teacher. GSX currently has around 200 lecturers, each with an average of more than 11 years of teaching experience in well-known educational institutions. The tutors are mostly new graduates from top Chinese universities with relevant academic backgrounds.

The dual-mode large-class which merges classroom teaching and distance learning at the same time is another competitive advantage promoted by GSX. 

However, most online education institutions currently adopt the double-teacher and big-class model, which can be easily applied in real-world situations. 

GSX has basically imitated the double-teacher model since TAL and New Oriental applied it into their teaching methods a long time ago. In an ideal competitive market, a profitable business model will be imitated immediately.

Unless the company has unique technologies, invention patents or a market monopoly, its business model cannot be treated as a competitive advantage.

As a latecomer to the market, GSX doesn’t have any scale and brand advantages either. Therefore, GSX’s teaching model is not a comparative advantage, nor can it explain the company’s success in the market. 

At present, the listed companies adopting the dual-teacher and big-class model are TAL, New Oriental Online and NetEase Youdao. Among these companies, both New Oriental Online and NetEase Youdao have provided data of the main operating cost in their financial reports.

Let's take a look at GSX’s main operating cost. 

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The main operating cost of GSX is much lower than New Oriental Online (87.2%) and NetEase Youdao (72.9%). Its main operating cost is only one-third of New Oriental Online and Netease Youdao in 2019. Based on previous experiences, one of the characteristics of companies conducting financial fraud is that their main operating costs are low (abnormal gross profit margin), and GSX’s data reflected this characteristic. 

To read the full article for free, please click here.