Event: FY21Q3's operating income was $1.19 billion (YoY+29%) and its net profit was $15.13 million (YOY+9.9%). The company expects FY21Q4 revenue to range from $11 to $1.14 billion, YOY+38%~43%.

Comments:

1. The income side exceeded expectations, and the profit recovery rate lagged behind that of the income side due to the increase in rent, teachers' salaries and the expansion of the OMO team. The Q4 profit margin decline is expected to continue to narrow 1. Revenue side: FY21Q3 revenue of $1.19 billion, exceeding the upper limit of last quarter guidelines and Bloomberg consensus expectations (both $1.14 billion), an increase of 29% compared with FY20Q3, considering that FY20Q3 has an one-month outbreak period, the base is low, if the FY19Q3 is used as the base. This is equivalent to a compound annual growth rate of 22%.

From the point of view of volume and price, the number of FY21Q3 registrations is about 2.3 million, and the high growth of average ASP (cash income / enrollment) YOY+7%, enrollment of YOY+43%; courses lays a good foundation for Q4. In terms of hourly unit prices, this quarter's YOY+7%, is in line with the company's average price increase rate of 5% Murray 8%.

2 cost side: the cost of the main business of FY21Q3 is US $540 million, the gross profit of YOY+35.3%, is US $650 million, and the gross profit of YOY+24.1%; is 54.7%, which is 2.1 pct lower than that of the same period last year, and the rate of decline is further narrowed (20Q4/21Q1/21Q2 decline 4.9/6.1/5.4pct). The gross profit margin of this quarter is still slightly lower than that of the same period in history, on the one hand, the company has seized the opportunity of industry clearance brought about by the epidemic to expand against the trend and increased investment in teaching centers, teacher recruitment and teacher treatment. On the other hand, as FY21Q3 is the first Spring Festival after the outbreak, the prevention and control is relatively strict, and the impact on the income side has not completely subsided, we believe that as the spring and summer semesters (corresponding to FY21Q4, FY22Q1) enter a new round of enrollment expansion, profit margins are expected to improve.

3 expense side: the sales cost of FY21Q3 is US $160 million (YOY+32%), and the sales expense rate is 13.1%, an increase of 0.3pct over the same period last year, mainly due to the increase in marketing personnel brought about by the implementation of the OMO strategy. The management cost was US $390 million (YOY+36.1%), and the management expense rate was 33%, an increase of 1.7 pct over the same period last year, mainly due to the increase in personnel brought about by the expansion of the network and the R & D investment related to the development of the OMO system.

Profit side: FY21Q3's operating profit was $100 million, while YOY-13.5%, 's operating margin was 8.5%, down 4.2 pct from a year earlier, narrowing the decline (7.8/7.7/6.8pct in the first three quarters). Non-GAAP 's operating profit was $160 million, while YOY-14%,non-GAAP 's operating margin was 9.7%, down 4.9pct from a year earlier (down 8.1/7.2/6.2pct in the first three quarters).

Cash on hand: cash and cash equivalents at the end of FY21Q3, term deposits, short-term investment balances totaling US $6.08 billion.

6 Deferred income: as of the end of the FY21Q3 period, the company's deferred income balance was $1.87 billion, YOY+35.7%.

2. K12, overseas study business all exceed expectations, Q4 guidelines are optimistic; in the past four quarters, 103 new schools and learning centers have been added, and 25 satellite cities have been entered through OMO; it is estimated that OMO revenue will account for about 10% of the following year, and the profit margin of the model will be higher.

1K12 AST: revenue YOY+37%, expects Q4 YOY+45%~50%. Among them, Youneng Middle School income YOY+35%, bubble children income YOY+40%.

2 overseas study business: the YOY-12%, of overseas study examination and training income has narrowed (- 62% in the first three quarters, respectively), and Q4 is expected to become a regular (YOY+30%). The income of study abroad consulting and overseas study abroad business is YOY+11% (6%, 31%, 6%, respectively, in the first three quarters).

3VIP personalized tutoring business: cash income YOY+36%.

4Teaching network and OMO: up to 1625 schools and teaching centers in FY21Q3, an increase of 209compared with the same period last year, including 118schools, an increase of 1 in Hengshui (Hengshui), and a total classroom area of YOY+17%,QOQ+7%. FY21Q3 has implemented the OMO strategy in existing cities and 25 new surrounding satellite cities. OMO-related investment totaled US $59 million in the current quarter, and management expects OMO revenue to account for 10% of the following year.

3. Profit forecast and valuation: with regard to policy, we believe that: (1) the implementation of long-term and normal supervision is fundamentally conducive to the healthy and orderly development of the education and training industry, and in the long run, it is also conducive to standardizing operation, management norms, promoting universal education, and providing quality content and services. 2 in the short term, there are many rumors about the recent regulatory policy, but there is no clear plan, so the company suspends the announcement of its offline expansion plans for next year, but it has a strong ability to cope with the abundant cash on hand and the acceleration of OMO development. We expect the company's net profit to be $654 million for FY2022-FY2023, $0.38 million for EPS and $0.53 for PE, maintaining a "recommended" rating.

Risk hints: the risk of stringent education policy, the risk of public health events, the risk of less than expected increase in the number of students, the risk of lower-than-expected profit of online education business, the risk of downward shift of valuation center, the risk of less than expected expansion of OMO and entity center, the risk of exchange rate fluctuation, the risk of intensified market competition, the risk of brand reputation, the risk related to management, the risk of changes in international relations affecting the demand for studying abroad, and so on.