On April 25, Chalk (02469.HK) released its 2023 annual report. According to financial reports, chalk's revenue in 2023 was 3,021 billion yuan, up 7.5% year on year; adjusted net profit was 445 million yuan, up 134.1% year on year.
Against the backdrop of strong supply and demand in the education and training industry last year, chalk's performance improved steadily, and profitability was released at an accelerated pace. Further lengthening the timeline can also clarify the fact that after experiencing a period of industry adjustment in recent years, Chalk is an education brand that has rapidly recovered and continuously surpassed competition.
From an investor's perspective, what kind of underlying logic has been captured behind the growth of chalk?
Market demand has improved, and the OMO model has significantly boosted profitability
The recruitment scale for the national examination rose steadily last year, and the number of applicants showed an increasing trend. Also taking advantage of the popularity of the national examination, the public examination training market improved, but the performance of the leading companies involved in 2023 gradually diverged.
Compared with the three biggest companies in the public examination, Chalk, China Public Education, and Huatu Mountain Ding, judging from the financial reports or performance forecasts issued by each, chalk continued to grow and the scale continued to expand; CCG's revenue for the first three quarters of last year was 2,665 billion yuan, down 30% from the previous year. Combined with its latest performance forecast, it may be difficult to achieve significant growth in annual revenue.
In terms of other core business indicators, Chalk achieved gross profit of 1.57 billion yuan in 2023, an increase of 14.9% over the previous year. Gross margin rose to 52% from 48.6% in 2022, driving rapid growth in adjusted net profit. The Chinese Government expects net losses attributable to shareholders in 2023 to be 175 million yuan to 225 million yuan, a significant reduction in losses compared to 2022. Furthermore, compared to 2022, Huatu's profit changed from profit to loss last year.
Judging from business logic, chalk can achieve a double improvement in profit scale and profit quality. The core is channel collaboration brought about by the OMO model (integration of online and offline), especially in the context of the continuous recovery of offline classes, making the effects of the OMO model “1+1>2” more prominent.
In 2023, the chalk training business generated revenue of 2,514 billion yuan, of which high-priced small classes achieved revenue of 1,665 billion yuan, accounting for 55.1% of revenue. Led by the OMO model, small classes became the main driving force for the business.
Over the past few years, Chalk has accumulated a good user reputation through online systems and quality courses, and since then, by promoting the OMO model and continuing to deepen, user reputation has been further enhanced.
According to the official statement, while meeting the needs of some students for offline classroom teaching formats, chalk effectively combines the high efficiency and strong targeting of online products, solves the pain points of low utilization of teachers and space under the traditional offline model, and achieves optimal solutions for shared student resources and resource allocation.
Therefore, with the OMO model, chalk has further improved the user experience, and users are also more willing to “pay” for high-quality small classes. Coupled with the OMO model connecting online and offline, it can effectively convert chalk's huge online user traffic. As a result, the penetration rate of small classes with high customer unit prices continues to increase, significantly increasing chalk's profitability.
Increase the release of the “flywheel effect”, and long-term value leads education and training through the cycle
No matter when, education and training industry practitioners are always thinking: how can we grasp the changing trends in the industry, and what kind of education is a good education?
As far as chalk is concerned, its answers have never been able to bypass the main line of “word of mouth”. Chalk has long focused on everything from product course quality to the formation of user reviews. Some research institutes pointed out in research reports that chalk, as a leader in recruitment testing and training, has strong product course development and technology research and development capabilities, and word of mouth has formed a strong vitality in customer acquisition.
Chalk has provided online services such as live courses, online question banks, and online mock test systems, and has built an online platform through the full ecological layout of the official website+APP+web client+WeChat Mini Program.
In 2023, the chalk MAU reached 9.1 million, an increase of about 1.2 million over the previous year. The chalk app added 11.81 million new users, and the peak monthly activity reached 10.6 million. Operational indicators such as the number of question bank users, the number of mock test applicants, and the peak number of live streaming users performed well. Every year, 20 million question bank users contributed more than 10 billion questions, and the peak number of live streaming users increased 254% over the same period last year.
Driven by strong R&D technology, chalk brings high-quality products and content to ensure a good user experience, thereby continuously attracting users and helping to increase brand awareness and reputation.
On this basis, chalk continues to increase investment in various areas such as teacher quality and technical empowerment.
In terms of teacher quality, Chalk continues to guarantee the quality of teaching through teacher training and experience assessment. Furthermore, in 2023, chalk further improved the construction of the teacher system, and the overall class usage rate increased from 86% to 106%, continuously improving the teaching and research coverage of local examinations.
In terms of technological innovation, chalk strengthens the application of AI technology to improve teaching efficiency and service quality. According to the data, the average time for teachers to write a report was reduced from 20 minutes to 5 minutes, and the AI pilot evaluation saved 50% of the time. It can be seen from this that in 2023, the per capita contribution income of lecturers was 937,000 yuan, an increase of 31.4% over the previous year, and the efficiency of AI empowering people was continuously optimized.
In addition, the intelligent correction system independently developed by Chalk, and functions such as AI interview review, questions, and analysis have all been launched to assist daily work, and the availability rate has reached more than 80%.
Therefore, it can be seen that a “flywheel” for chalk growth has initially been formed. The quality of product courses has been converted into revenue, and the revenue can also bring a sustainable boost to its subsequent investment in teachers, teaching and research, and technology.
In this process, the user experience continues to improve, and the brand continues to accumulate word of mouth, further consolidating the revenue side and customer acquisition side, and ultimately forming a positive cycle of performance growth. At the same time, as AI technology empowers the OMO model and continues to deepen, chalk optimizes cost control, and future breakthroughs in terms of profit are clearly foreseeable.
As Xiaolong Zhang, founder and CEO of Chalk, mentioned in the shareholder letter, Chalk insists on making high-quality, high-margin products with leading experience and technology, focusing on word of mouth and efficiency, and stated that it does not pursue short-term revenue scale and market share, and values “better quality for users, better treatment for employees, and better profits for the enterprise.”
epilogue
In the long run, building up word of mouth is always the “best way” to achieve efficient improvement in business operations and continuously realize value.
In the education and training industry, word of mouth is the biggest source of user trust, and it never changes. Choosing a brand with a strong reputation is essentially that Chinese people expect a better career development and growth path and give full trust to the brand.
Education and training require simple word-of-mouth supremacy, and chalk has always been in this direction, constantly putting investment into practice. The current pattern of the industry is undecided. Chalk is actively grasping changes in the industry, leading new trends in the industry, and the development prospects are worth looking forward to.