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ANALYSIS: Sunlands Technology Group Delivers Positive Revenue Trajectory Amid Stock Slump

Sunlands Technology Group has produced steady revenue growth despite regulatory challenges in the Chinese education industry.

Donovan Jones
    May 19, 2019 5:05 AM  PT
ANALYSIS: Sunlands Technology Group Delivers Positive Revenue Trajectory Amid Stock Slump

Short Take

Sunlands Technology Group (NYSE: STG) went public in the U.S. in March 2018 and has reported financial results through its fourth quarter 2018.

The firm provides Chinese students with online education and tutoring resources.

STG is growing topline revenue and gross profit while reducing losses on an apparent path to profitability.

Company & Technology

Beijing, China-based Sunlands, previously known as Sunlands Online Education Group, was founded in 2003 as a traditional offline education company, but it made the switch to online in 2014.

Management is headed by CEO Tongbo Liu, who has been with the firm since 2009 and was appointed to the CEO position in January 2015. The company's founder, Peng Ou, is Chairman of the Board.

Sunlands has created an online tutoring system that provides flexibility and increased chances of passing degree program tests in the postsecondary markets within China.

The firm provides a wide range of test preparation courses, from community college level to professional designations such CPA exams to full MBA curriculums.

Sunlands appears to focus its offerings on the lower end STE market, or Self-taught Higher Education Examinations, which covers 18 majors.

Customers & Market

STG acquires its students through search engine marketing, mobile marketing, and offline channels.

The firm has a significant direct sales force and ‘adopts a counseling-oriented sales marketing approach that seeks to offer our education solutions to meet their [students'] needs based on their education background and goals... In addition, our enrollment consultants also help them formulate effective study plans throughout their enrollments in our courses.'

So, the firm's STE focus may operate as an ‘on-ramp' of sorts for its higher education and professional programs.

STG also offers various financial services to students to enable them to afford the course curricula of their choice. Sunland's contracts with third-party loan companies to provide it with payment for loans that it arranges on students' behalf.

The firm recognizes expenses associated with customer acquisition within its Sales and marketing expenses line item. Its Sales and marketing expenses as compared to revenues was 136% in the first six months of 2017 vs. 124% for the same period in 2016.

While third-party figures for the online post-secondary education market in China are difficult to find, the overall online education market is growing substantially.

A 2017 article by Bloomberg highlighted the ‘lucrative business' of China's private education market.

Sunlands cited an iResearch report (that Sunlands commissioned) indicating significant growth in the size of its part of the online education market.

(Source: Sunlands Technology)

Recent Performance

STG's topline revenue by quarter has been steadily increasing since the firm's IPO in March 2018, as the chart shows below:

(Source: Seeking Alpha)

Gross profit has also increased in step with topline revenue growth:


(Source: Seeking Alpha)

Analysis of earnings call sentiment by analysts indicates a strongly lower trend, perhaps explaining part of the stock's 2018 downward trajectory:


(Source: Sentieo)

With the exception of Q4 2018, earnings surprises have been negative, likely contributing to the stock's declining price during 2018:

(Source: Seeking Alpha)

Commentary

While Sunlands has shown remarkable revenue and gross profit growth, G&A costs, including hiring and retaining teachers, remain a high percentage of revenue.

Additionally, the firm continues to have high capital expenditures in purchasing buildings and it infrastructure management deems necessary for its continued growth.

Management also failed to provide clear guidance for 2019 results other than to say they continue to adjust their free trial offers and increase the number of courses offered through the system.

Furthermore, in its most recent earnings call, company leadership didn't provide a clear vision of how it would increase its speed to breakeven, leaving investors to come to their own conclusions.

With basic Earnings Per Share showing a path to profitability, perhaps these concerns will be mooted by performance improvement, as the EPS chart shows below:

(Source: Seeking Alpha)

Unfortunately for Sunlands, in 2018 Chinese regulators published draft legislation to limit M&A activity with private education firms wanting to acquire public schools.

In response, the entire private education industry stocks sold off.

If the draft legislation is enacted, the firm will have fewer options for growth opportunities through public schools.

Sunlands will report its Q1 2019 results on May 28 and will conduct its earnings call the same day.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)


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