Edited by Western Securities: "New Oriental Education & Technology Group's Deep coverage II: online Education Business helps bottom-line City expansion"

Western Securities believes that there is still a lot of room for the development of K12 education in China, and unlike other Internet industries, the educational attribute of online education industry is stronger, because there will be no Internet winner-takes-all situation. New Oriental Education & Technology Group online and offline sharing standardized teaching, can break the advantage of the number of users, control enrollment costs, and strengthen core competitiveness.

1. The current situation of K12 online education in China: there is still plenty of room for development.

• The ceiling of online education

Western Securities believes that one of the reasons why there is still so much room for the development of online education isThe current penetration rate of online education in China is still low.Compared with South Korea, it is less than 1/3. Estimates based on data from Western Securities and Ferrost SullivanWith the popularity of the Internet and the continuous improvement of Internet infrastructure, the penetration rate of online education is gradually increasing.The size of China's online education market rose from about 33 billion in 2013 to nearly 100 billion in 2017, and the penetration rate of online education rose from 2.6% to 4.5%.

Western Securities believes that there are also two indicators linked to the penetration of online education and the development ceiling.One is our country.Internet penetrationRising year by yearWhich makes it possibleOnline education has the possibility of wide spread.Which means that there is still plenty of room for the development of online education and the ceiling is still high.

The second isThe penetration of online shopping can reflect the degree of national recognition of online consumption.With the rapid development of e-commerce in China, the penetration rate of e-commerce is gradually increased, and the national acceptance of online consumption is also increasing, which makes online education more possible.

• Educational opportunities for K12

At present, the education sub-industries with the highest online penetration in China are vocational training with and without academic qualifications, and language training. Mainly because the two target groups are mainly adults with strong self-driving force, and the target groups have clear target needs such as textual research or examination. On the other hand, the age level of K12 users is lower and the feedback time is longer, soThe online effect of K12 extracurricular tutoring is relatively poor and the permeability is low.。

Western Securities estimates that the current penetration rate of K12 online education in China is only about 4.7%, compared with other sub-industries, there is still a lot of room for improvement.

Due to the similar Asian cultural background, Western Securities summarized several industry characteristics of K12 extracurricular tutoring from South Korea, where online education is more developed, for reference: 1) the penetration rate of K12 extracurricular tutoring is directly related to peer competition among students; 2) the college entrance examination, as a baton of extracurricular tutoring, has a profound impact on the form of extracurricular tutoring; 3) in an environment with mature infrastructure, online education is easy to break out. 4) the prohibition of advanced education has almost no effect on K12 extracurricular tutoring.

To sum up, Western Securities believes that the development of online education needs to go through three stages: "infrastructure construction-technology improvement-content research and development", while China's online education, especially K12 online education, is in the stage of simultaneous development of the three. Regional imbalances have suppressed online education in low-tier cities, but once the infrastructure is in place, it is likely to break out very quickly. It is predicted that the penetration rate of K12 online education in China will rise to 6.2% by 2022.

2. New Oriental Education & Technology Group's competitive advantage: enrollment cost

Western Securities believes that the online education industry is outside a product-dependent industry, and its core competitiveness is the same as that of offline institutions.Enrollment cost。

• New Oriental Education & Technology Group's Brand effect

The cost of trial and error in the education industry is high, and users tend to choose institutions based on results, so they pay more attention to the brand, that is, the stability of the output of the educational institution. Therefore, for traditional offline educational institutions, carrying out online education has certain brand advantages.

Western Securities believes that in the initial stage of online education, New Oriental Education & Technology Group will enjoy a certain offline layout of brand dividends, which can save sales costs and lower enrollment costs.

• Standardization and effectiveness

Western Securities believes that the higher the degree of standardization of teaching, the lower the invisible enrollment cost, that is, the lower the proportion of teachers' salary to income. no, no, no. The standardization of teaching includes the standardization of teaching materials, the standardization of teaching process and the standardization of teacher training. The three can not only reduce the volatility of teaching quality and stabilize the output, but also enable inexperienced graduates to master skills in a short period of time, effectively reduce the personal role of teachers and increase students' transfer costs.

Standardization can also consolidate the organization's brand dividend, which can be called the amplifier of the brand. Brand means higher probability of access to quality teaching, standardization means further reducing volatility, so that enrollment costs can be further reduced. After the standardized teaching reform of K12 course in fiscal year 2015, New Oriental Education & Technology Group's enrollment cost dropped by 2%. TAL Education Group, who has always adhered to teaching standardization, also maintained the enrollment cost very well.

In fact, whether it is the establishment of brand or teaching standardization, it is to prove the effectiveness of its education, so as to reduce the cost of enrollment. Brand building is to prove its effectiveness from the impression, while teaching standardization is to prove its effectiveness from the path. Western Securities believes thatIt is proved that its effectiveness is the best way to reduce the enrollment cost.

• Online and offline collaborative development

Western Securities believes that online traffic costs are rising, making online customer acquisition costs a large part of enrollment costs, and having online education supported by offline entities will have more advantages in traffic costs.

The cost of online traffic is rising, the conversion rate of traffic is low, and the cost of pure online promotion to obtain students is high. Western Securities believes that the high cost of getting customers online can be solved in the early stages of development through the diversion of social groups or offline entities.

In addition to the role of diversion, online and offline business has the advantage of teaching sharing. The coverage rate of extracurricular tutoring in China's third-and fourth-tier cities is about 30%, the ceiling is still high, and the coverage area of offline institutions is limited. Institutions can cover different areas of online and offline business, and coordination is greater than competitive food competition.

Western Securities believes that at present, New Oriental Education & Technology Group still has a lot of room for expansion offline. The high offline coverage makes New Oriental Education & Technology Group less dependent on online business and does not need to invest too much resources to get customers.

3. The direction of development

• Live broadcast in small class or the best mode of K12
  

Western Securities believes that for K12 extracurricular tutoring, small class live class is the most appropriate model, under the premise of ensuring the effect, cover as many students as possible and reduce operating costs. And the enrollment cost of live broadcast in small class is second only to recording, but the effect is much better than that of recording.

Western Securities also believes that New Oriental Education & Technology Group should give full play to the strengths of his secondary education business, thanks to the stronger learning initiative of senior students, who can enter the online education business more quickly.

• B2C is more suitable than C2C.

Western Securities believes that B2C is a better model than C2C for online education, especially for K12. First of all, because of the poor network effect of online education, it is impossible to achieve the explosive growth of platform value through large traffic like e-commerce or live broadcast platform. Therefore, C2C does not have more advantages in the platform effect. Second, compared with C2C, B2C can better control the output quality of its own products and achieve the stability of product quality.

• The conversion of recording to live broadcast drives the business of universities.
  

Western Securities believes that New Oriental Education & Technology Group online's university business will maintain steady growth, mainly due to the increase in the number of people paying and the increase in average tuition fees brought about by the transition from recording to live broadcast in large classes.

In addition, the number of people preparing for exams at home and prices will tend to be stable, and the stable growth rate of overseas exam preparation business will also bring steady growth momentum to New Oriental Education & Technology Group.

4. Risk hint

Industry growth is not as expected; competition in first-tier cities is intensified; expansion effect is not as expected; double-division classroom progress is not as expected; industry policy risks.

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