Key points of investment:
Leading public examination training from the Internet to commercialization. Chalk was born out of Ape Counseling. It started with an online free question bank. During the commercialization process, it experienced a stage of rapid offline expansion to seize share but drag down performance. Later, it sought active changes, reduced the proportion of contract classes, expanded the OMO teaching model, gradually optimized the business model, and superimposed AI to reduce costs and increase efficiency, and adjusted net profit in 2022. Revenue increased +7.5% to $3.02 billion in 2023, adjusted net profit +134% year-on-year to $450 million, and adjusted interest rate increased sharply to 14.7%. Currently, the product structure relies on high-quality word of mouth and online volume to shift to core small class products. In 2023, online products/large classes/small class classes accounted for 4%/22%/55% of revenue. The subsequent focus is on expanding the size of small classes and improving the profitability of the OMO model.
There is still room for growth in the recruitment and training industry. The pattern is three-legged, and I am optimistic that the leading position of chalk will be stable.
According to Sullivan, the recruitment and training industry is expected to grow at 38.7 billion yuan in 2023, with a CAGR of 9.3%, driven mainly by an increase in the number of graduates, contributing to the expansion of the demand-side base; the employment situation forced strong demand for public examinations; the 60's baby boomers retired to release job supply; the expansion of civil service jobs under employment protection; number of applicants × training penetration rate boosts the scale of participation.
In 2022, the CR3 of the recruitment and training industry was 27%, of which chalk ranked 2nd, accounting for 6.9%. We expect leading companies and small long-tail institutions to compete in a hierarchical manner for a long time. Chalk will establish a healthy expansion model with pass rate > profit margin > revenue growth rate. It is expected that a continued stable reputation will help the company to establish a leading position.
Based on brand strength, OMO model innovation+AI empowerment, the leading position in public examination training is stable. A consistently stable high pass rate is a direct indicator of the quality of recruitment and training products. The company relies on high-quality teachers, strict training and assessment of lecturers, and excellent teaching and research capabilities at the headquarters to support course quality. App activity is absolutely leading, and brand volume forms an efficient word-of-mouth transformation. Chalk's online capabilities are leading, and the OMO model is gradually being implemented. Unlike pure offline institutions, the earlier, more homogenized entry-level courses were transferred to live online classes. The teacher-student ratio in the early stages was significantly optimized, and revenue growth was achieved while the number of lecturers and offline outlets shrank; the reserved offline portion met students' needs for differentiated interaction, restraint, and timely feedback. The business model was improved while ensuring excellent course and service quality. Long-term investment in AI construction explores the boundaries of instructor efficiency, and the core items of cost, venue rent and lecturer remuneration have dropped dramatically. Word of mouth guarantees growth, model innovation increases profit margins, and I am optimistic that chalk will continue to maintain the leading momentum in the industry.
Profit prediction and investment advice: From Internet products to mature commercial models, chalk has excellent reputation and quality first, and pursues a balance of adoption rate+profit margin+revenue growth. We are optimistic that excellent teachers and teaching and research capabilities will guarantee long-term product quality. Reputation transformation and funnel product structure will drive revenue growth. The OMO small class model and AI empowerment will support increased profit margins, maintain leading positions while reducing costs and increasing efficiency. The company's net profit for 2024-2026 is estimated to be $5.7/75/ $92 billion, respectively, and adjusted net profit of $6.3/7.8/950 million, giving it 20 times PE in 24 years, corresponding to a target price of HK$5.93, for the first time coverage and a “buy” rating.
Risk warning: Examination recruitment is being curtailed or reformed, industry competition intensified, negative public opinion, technology investment results fell short of expectations, progress in expanding new business areas fell short of expectations, and regulatory policy changes.