Initiating coverage with an Outperform rating and a $10 price target. QuantaSing is the largest online individual learning service provider in China, by revenue. It launched in 2019 with a focus on adult financial literacy courses, before expanding to personal interest courses. Additionally, the company operates an e-commerce platform focused on liquor, which could expand product offerings in the future. Our favorable rating is based on the company’s positive cash flow growth outlook.

Scalable business model. The company acquires customers at a low cost by offering free introductory courses advertised through online sources, providing a large audience to which it can sell its premium courses, Currently, the company has over 94 million total registered users on its free course offerings. Notably, the company can quickly develop new courses tailored to customer needs, which provides flexible monetization opportunities.

Favorable outlook. In our view, the company is well positioned for profitable revenue growth. We are forecasting fiscal 2024 revenue growth of 15.1% to RMB3.547 billion ($486.6 million) and adj. EBITDA margins of 12.6%, resulting in adj. EBITDA of RMB446.0 million ($61.2 million). In fiscal 2025, we anticipate revenue growth of 14.4% and adj. EBITDA margins of 14.7%, resulting in adj. EBITDA of RMB599.0 million ($82.2 million).

Strong financial position. As of June 30, the company had RMB764.3 million ($104.9 million) in cash and no long-term debt. Given the company’s free cash flow generation, which we estimate will be RMB370.0 million ($50 million) in fiscal 2024, we do not anticipate that it will require additional capital. On the other hand, the company could seek to repurchase shares through a recently announced 1-year, $20 million share repurchase program.

Compelling valuation. Near current levels, the shares trade at 0.2 times enterprise value to our 2024 revenue forecast, well below the industry peer group average of 3.7 times 2024 revenue. We are initiating coverage with an Outperform rating and a price target of $10 per share (ADS). Our conservative price target reflects a target enterprise value of roughly 1.0 times our 2024 revenue forecast.