The Post-Covid-19 Strategy of 51Talk

The leader in the one-on-one online English learning market in China is targeting high-growth, formerly underserved areas.
CapitalWatch StaffFeb 11,2021,21:14

Chunyun, or Spring Festival, in China has begun last week ahead of the Lunar New Year on Feb. 12. Traditionally, this is travel time for the Chinese, but in 2020 the nation had learned a tough lesson. This year, China wants to avoid turning the holiday into a superspreader of Covid-19 by limiting travel.

Around the same time last year, schools closed as China reeled from the Covid-19 epidemic, and would remain so for three months. In this educational void, the nation’s schools, parents, and students turned to online education. Demand skyrocketed, especially among K-12 students, and online education companies with the bandwidth and expertise benefitted from this once-in-a-generation paradigm shift.

Among the companies that stepped up to satisfy their nation’s educational needs during this difficult time was China Online Education Group (NYSE: COE), also known as 51Talk, which reported a 77% increase in K-12 one-on-one mass market revenues for the first quarter. As 2021 begins, and China looks forward after having conquered the pandemic, CapitalWatch zooms in on 51Talk’s market position in the English language training (ELT) space in China.

Education has been one of China’s fast-growing industries, boosted by the rising household income, parents’ willingness to spend on their children’s studies, government incentives, and the end to the one-child policy. Meanwhile, China has been one of the biggest English-learning markets despite tensions with America and much of the West in recent years.

English learning has been mandatory since grade one, and many children start as early as kindergarten, according to a China Highlights report. The same report, however, states that less than 1% of mainland Chinese know English on a conversational level, which suggests continued demand for quality English education. Research firm Statista estimates the ELT market in China will grow from $41.5 billion in 2017 to $75 billion in 2022. And while there are many competitors in the field, a few stand out.

Boom of E-learning in 2020

51Talk’s mission is to make English language learning available anytime, anywhere through the use of technology. The shift to e-learning was made possible by the omnipresent internet and widespread access to PCs, laptops, and mobile gadgets. Meanwhile, online lening made use of new technology possibilities, now integrating livestreaming and interaction, entertainment, artificial intelligence, and big data. It also allowed e-learning providers to deliver a customized student experience.

In 2020, the acceptance of online learning was propelled by the Covid-19 outbreak. Parents and students saw the benefits of online learning. To wit, even after offline schools reopened, growth in the e-learning sector did not significantly decrease.

51Talk posted year-over-year revenue growth of 52% for the first quarter of 2020 with 70.4% gross margin. Second quarter revenues rose 40% and gross margin was 70.9%, and third quarter revenue growth was at 31.8%, with gross margin at 72.8%, beating preceding-year figures across the board.

Gross billings, which 51Talk sees as its key operating data, reached $107.3 million in the third quarter of 2020, up 33% from the same period of 2019. In 2020 Q1, gross billings increased 32% and in Q2 – 36% across all segments.

In terms of active students, 51Talk counted 286,600 students in the first quarter of 2020, at a 26% increase, 298,200 students in the second quarter, up 28%, and 338,000 students in the third quarter of 2020, up 31% year-over-year. This shows student base picking up after the school lockdowns were lifted, which may be attributed in part to the resumed need for test prep studies.

Stock Soars 140% From Pre-Covid Levels

Since early 2020, COE shares have more than doubled in trading as U.S. investors recognized the opportunity in China’s high-growth ELT market. In mid-January, 51Talk traded at near $10 a share, sprang up to its peak of $37.19 per share in March, then levelled off to an average of $24 per share at which it sits today. That stands in stark contrast to its 2019 levels of around $6 per share.

While 51Talk has not received the attention of many Wall Street analysts, two have issued their ratings of the Chinese company over the past year, both at “buy.” Benchmark raised its price target from $14 to $38 per share and Needham & Co. LLC began its coverage at $36 in March 2020 and reiterated the same in November 2020.

51Talk’s chief financial officer, Min Xu, told CW in a late 2020 interview that he sees COE stock as undervalued. With confidence, Xu commented at the time: “As we grow, outperform our peers and competitors, get more news and market research out there, we’ll get investors’ attention and the stock price will reflect its intrinsic value and growth potential.”

Separately, 51Talk has also launched a share repurchase plan in 2020 to boost its trading mark.

Attractive Prices + Foreign Teachers = Better Results

51Talk operates online and mobile education platforms that enable students to take live interactive English lessons with teachers overseas. One-on-one learning with native speakers of English is the key product 51Talk offers and the way it differentiates from its competitors. During a lesson, student output is measured to ensure faster improvement.

Currently, flagship courses include Classic English Junior and Classic English for the development of English communication skills. 51Talk also offers American Academy and Small Class courses; New Concept English course; and various specialty courses, such as Business English, IELTS Speaking, Free-talk, Interview English, Travel English, and Daily English for situation-based English education. Potentially, 51Talk will expand its course portfolio to include other subjects, according to Xu.

51Talk’s well-trained teachers are located in countries where English is the official language. The company’s teachers are primarily in the Philippines, as well as the United States and Canada. Early on, the management at 51Talk was visionary in recognizing the untapped potential of the Philippines and its native English-speaking population. 51Talk established a branch in the country and began to hire and train locals as English language teachers. Xu said the company attracts a large pool of candidates in the Philippines and has acceptance rate of 5%, which indicates the high level of expertise 51Talk requires from its teachers.

Employing teachers from the Philippines allowed 51Talk to offer attractive prices, charging three-to-four times less than English language learning platforms such as VIPKid. According to Xu, a 25-minute study session for K-12 costs 40 yuan and 51Talk is not planning to raise prices anytime soon.

Further, Xu claims that 51Talk’s students see better results compared to students of rival ELT providers. Also, the longer a student learns via 51Talk, the more value the student receives. The company boasts both a high student retention rate and a high referral rate (as high as 69% in Q3 2020), resulting in lower customer acquisition costs.

As competition in the sector heats up and Covid-19 subsides in China, 51Talk believes it can thrive in relation to its peers, continuing enable its students to achieve superior results with its one-on-one classes.

Opportunity in Rural China

Traditionally, most students from rural China end their English studies earlier than in upper-tier cities as they tend to choose vocational schools. The price to attend senior high school is expensive, and the quality of education in rural schools may be lacking, without access to elite teachers, materials, and technology.

51Talk provides these students access to native English language speakers that can rarely be found in offline learning. Moreover, the company is bringing high quality English training to students who previously had extremely limited opportunities.

51Talk founder, chairman, and chief executive officer, Jack Jiajia Huang, who grew up in a suburban area himself, said people from his town couldn't afford to learn English. That later formed Huang’s plan to help his fellow Chinese people to “speak to the world,” as he told CW in a “Spotlight” interview in December 2020.

“We help students pay less, but gain more,” Huang has said. “Although we are now profitable, our goal is never to just make money, but to provide better teaching quality to students.”

For the year 2021, expansion in rural China is a major goal for 51Talk. Its competitive prices, the company believes, will make its lessons especially attractive to lower-tier cities. The company has been investing in R&D to make its platform more usable for student in rural areas who may not have PCs or laptops but can study via smartphones.

In addition, 51Talk is improving its curriculum to adapt to English language learners who are starting from scratch and may find it difficult to communicate with foreigners. When a student passes the initial entry level, 51Talk will then provide that immersive learning experience it focuses on

Now, 51Talk prepares to release its fourth quarter financial results and students across the country await the biggest holiday of the year.

“Since its establishment nine years ago, 51Talk has been continuously seeking high cost-effective educational resources, establishing distinct competitive advantages and the ability to adapt quickly evolving environment,” Huang said.

“With all the efforts made by our employees, 51Talk is gradually achieving the mission of ‘let everyone have the ability to talk to the world.’”

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Topics:COE, 51Talk, China