Last Friday, there was a lot of blood in the US stock market. In retrospect, it seems that the direct cause is the following man who looks like the old Yue Yunpeng, whose fund products have suffered heavy losses in China-listed stocks and technology, thus causing a series of domino events.

The entire Chinese stock market was wiped out, and the education sector was not immune. On March 26, US time, New Oriental (EDU), one of the three giants, closed down 11.12%, good Future (TAL) closed down 7.44%, followed by the biggest intraday decline of more than 55%, then rebounded, and finally closed down 41.56%. The stock price fell nearly 80% in two months from its peak, directly "ankle chopping".

The two falls in K12 are due to the "policy documents" circulated in the market, and the first decline stems from the so-called rumors that all offline training institutions in Chaoyang District have closed down for rectification.On that day, the general education stock generally fell by more than 10 points, and after the "Chaoyang District document" was falsified, the market broke the following rumors, involving five items, including online product bans, tuition pricing restrictions, advertising restrictions and anti-monopoly restrictions; affected by this, the market suffered another huge shock, but as of press time, no organization has yet to authenticate the rumors.

01

Market rumors caused a huge shock in the general education stock.

But we put aside the noise in the market and from the nature of things, we divide K12 into three dimensions: policy anatomy, market outlook and company valuation. Let's focus on the most likely distribution form of regulatory policy; whether these two falls are the wrong killing caused by the panic flight of the market, or a reasonable return to the company's valuation, and whether there has been a gold pit in the market.

02

What is the impact of the policy spread on the Internet?

First of all, there is the issue of policy. The essence of this round of K12 panic and decline is pessimistic expectations for future policy supervision. On March 9, leaders announced that they would standardize out-of-school training, which aroused widespread concern in the market about K12 education.

From the point of view of the existing policy, it mainly involves several aspects:(1) norms for teachers inside and outside the school, (2) standardization of teaching material system, (3) strengthening the supervision of online and offline training institutions, etc.；Most of the supervision is regulated and supervised, for example, the examination and approval of the content of teaching materials is expected to be on the ground, but rarely in the form of prohibition; the Education Commission of the State Council has also issued guidance on charging in advance for no more than 3 months or 60 class hours, and the relevant policy papers are expected to be formed in the follow-up.

As for the two policies with great influence, advertising and anti-monopoly, first of all, the advertisements currently banned in the official media are mainly cigarettes, health products and other products, and the carriers involved are mainly radio and television media. K12 educational products obviously do not belong to the same category. And by the end of 2020, New Oriental, good Future, who learned from more than 90% of the advertising invested in the Internet and offline media, and so on, it is very little affected.

In terms of anti-monopoly, subject to the obvious differences in local college entrance examination policies, the market pattern of K12 education in China is still very scattered; by the end of 2019, the CR6 ratio of K12 education even online is about 25%, and offline is even lower, which is far from the formation of monopoly gap, so the applicability of anti-monopoly policy to K12 is low.

To sum up, the author thinks that some of the so-called five-point policies circulated on the Internet will not be introduced or meaningless (such as banning online educational products and antitrust before the age of 6), and some policies will be introduced, but they will not be realized at once. This will be a process throughout the year.In the short term, the general decline of more than 40% in individual stocks in the market has obviously overreacted to the policy.But it can not be ignored that media policy regulation has always been a long-term process, short-term overdraft may bring room for rebound, but we should still be wary of long-term regulatory pressure.

And it is worth mentioning that if regulations impose strong restrictions on capital investment and advertising investment, educational institutions will lose the ability to burn money to generate traffic, and it will be much more difficult for brands to achieve "corner overtaking". On the other hand, this is undoubtedly good for the old brand "New Oriental, good Future", which has been precipitated. Its industry concentration is expected to increase significantly in the future, and the leading company will always maintain its core player status.

03

In terms of 5-10 years' dimensions,

K12 education is still a thriving industry.

Secondly, it is about the judgment of the industry prospect of K12 education.This needs to be analyzed from the two dimensions of quantity and price, in which the essence of quantity is the number of people being taught, which is mainly affected by the total number of people of the right age and the level of participation. AndIn terms of price, it depends on residents' consumption expenditure on K12 education from the point of view of the industry as a whole.。By grasping these two dimensions, we can basically make a reasonable judgment on the prospect and growth rate of the industry.

From the perspective of the K12 population of the right age, there will be no obvious change in the total number of people of the right age in recent years, with an overall increase of about 2 million, and the growth rate of the population of the right age will be maintained at about 1%. Compared with Hong Kong, Taiwan and neighboring countries in East Asia, there is still a large gap between mainland China and Hong Kong, Taiwan and neighboring countries in East Asia. We make the following forecasts and conservative estimates for the number of people in the K12 training market in the next few years. Suppose that in the next 10 years, the participation rate will gradually increase from the current 38% to the level of Japan and South Korea (70%), and the growth rate will be 6.28% annually.

And thenIn terms of per capita expenditure on educationAs a kind of recreational consumption, educational expenditure has the attribute of recreational consumption. It mainly benefits from the overall growth level of per capita disposable income, and after reaching a certain extent, it will maintain a stable growth rate, rather than occupying other consumption options. We refer to the per capita education expenditure of K12 residents in the past five years. It is estimated that the average growth rate is basically maintained at 8%, 9%, so it is expected that the future growth rate will also be maintained at this level, there will be no significant increase or decrease.

To sum up, after the split of several dimensions, through the formula:

K12 industry growth = (growth rate of students in 1+K12 phase) * (1 + participation rate growth rate) * (1 + per capita expenditure growth rate)-1

It can be estimated that the growth rate of K12 education industry will grow steadily in the next 10 years, and the growth rate will remain at an annualized rate of about 15.93%. From this point of view, K12 education is still an industry with great room for growth, which we are optimistic about for a long time.

04

From the perspective of valuation, the gold pit

Finally, on the specific stock valuation, the representatives of the general education unit are mainly New Oriental and good Future, both with annual revenue of more than 20 billion yuan, leading effect is significant, the second echelon representatives are who to learn from, the volume is between 2 billion yuan and 4 billion yuan, and there is a large gap with the head. New Oriental, good Future and who to learn from represent the performance of large-cap stocks and small and medium-sized stocks in this field, respectively. At present, compared with the previous highs, these three companies all have a very large drop. For whether the current valuation is reasonable or not, we analyze it from the revenue side and the cost side.

At the end of the operation, we also look at the two dimensions of price and volume. As far as the price of a single course is concerned, the competition pattern of the education industry as a whole is very scattered, and even the share of the two Longtou market is not high, so the price increase of regular course tutoring is not large. Some are even cutting prices. ToGood Future (TAL)For example, from 2017 to 2019, the growth rate of customer unit price will be 2.5%, 8.2%, 8.4%, respectively. Under the situation that the industry leader is still driving down the price, it is difficult for the industry to have the overall logic of price increase in the short term.

In terms of volume, the growth rate of online education increased sharply in 2020.From whom to learn (GSX)For example, the revenue of K12 online courses for the whole of fiscal year 2020 was 6.237 billion yuan, an increase of 265.5% over the same period last year. The number of people who paid for the positive price courses of K12 online courses reached 5.429 million, an increase of 177.3% over the same period last year. Taking into account that the market will return to pre-epidemic levels, return to normal growth, and superimpose possible policy restrictions, we have lowered our previous recovery expectations.

On the cost side, due to the offline shutdown caused by the epidemic, although a large number of small and medium-sized companies in the industry were cleared, in order to ensure the survival of the company, large players in almost all industries focused on online, and the track suddenly became very crowded. The result is to enter a money-burning war, including drainage and teacher costs are significantly increased, hurting the company's profit margins. ToWho to learn from?For example, in order to improve the quality of teaching and student experience, the company's teachers' salaries increased, resulting in a 6.9 percentage point year-on-year drop in gross profit margin to 72.1%.

The cost of getting customers in the industry continued to rise during the year, and the company's sales expense rate increased by 34.1 percent to 81.3 percent compared with the same period last year. The sales cost of dint 2020Q4 is as high as 1.8 billion yuan (of which the flow fee is about 1.27 billion yuan, and the brand fee is 60 million yuan). The company's R & D and administrative rates rose 3.5 and 4.9 percentage points year-on-year to 12.4% and 9.8% respectively. The company was dragged down to an operating loss of 700 million yuanConsidering that this kind of cost has a ratchet effect, players can not easily reduce or leave the field after investment, so in the short term, the trend of enclosure horse running can not be reversed.

Considering that the industry pattern is mainly enclosed horse racing, and user growth rather than profit is taken as the main measure of growth in the short term, the PS valuation method is adopted.We base our three stocks on the closing price of March 29th, as shown in the table below.

Compared with the valuation center of the three companies in the past five years, the valuation center of TAL (PS) is 9.29X, and that of New Oriental (EDU) is 5.74X. Among them, the listing time of GSX is shorter, during the period of PS valuation is 7.43X, it can be seen that the three companies are now significantly lower than the valuation center level. It can be expected that after the stock price stabilizes, there will be room for valuation repair within the next month.In a sense, the capital explosion and market panic have created a golden pit.After waiting for the market to stabilize in the past two or three days, we will then enter a stage of valuation repair, when there is room for operation, and in terms of investment targets, industry leaders will be better than small and medium-sized votes; but in terms of the span of the year, whether the stock price can fully recover, we need to wait for specific regulatory policies to actually land before they are judged.

In terms of riskFirst of all, we still need to guard against the regulatory pressure brought about by the country's long-term supervision of K12 education, and then we need to closely follow up the strength and intensity of the release of specific policies, including advertising diversion, charging system, etc.; in particular, whether there are policy restrictions on K12 education capital, we can track whether the ABS and IPO process of K12 education companies, including Yuanfudao, homework gang, and other K12 education companies, is blocked. Second, guard against the delay in offline recovery caused by repeated outbreaks, which will have an impact on the company's revenue.

Gronghui statement:The views in the article come from the original author and do not represent Gronghui's point of view and position. In particular, it is reminded that investment decisions should be based on independent thinking. The contents of this article are for reference only, not as practical suggestions, but at your own risk.。

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